Nasdaq, Inc.
NASDAQ OMX GROUP, INC. (Form: 10-K, Received: 02/18/2010 17:31:01)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 000-32651

 

The NASDAQ OMX Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware   52-1165937

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

One Liberty Plaza, New York, New York   10006
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

+1 212 401 8700

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value per share   The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x     Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $3.0 billion (this amount represents approximately 142 million shares of The NASDAQ OMX Group, Inc.’s common stock based on the last reported sales price of $21.31 of the common stock on The NASDAQ Stock Market on such date).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at February 3, 2010

Common Stock, $.01 par value per share   211,435,383 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document

 

Parts Into Which Incorporated

Proxy Statement for the 2010 Annual Meeting of Stockholders   Part III

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

Part I.

     

Item 1.

   Business    2

Item 1A.

   Risk Factors    22

Item 1B.

   Unresolved Staff Comments    36

Item 2.

   Properties    37

Item 3.

   Legal Proceedings    37

Item 4.

   Submission of Matters to a Vote of Security Holders    37

Part II.

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    38

Item 6.

   Selected Financial Data    40

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    42

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    84

Item 8.

   Financial Statements and Supplementary Data    84

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    85

Item 9A.

   Controls and Procedures    85

Item 9B.

   Other Information    87

Part III.

     

Item 10.

   Directors, Executive Officers and Corporate Governance    87

Item 11.

   Executive Compensation    87

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    87

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    89

Item 14.

   Principal Accounting Fees and Services    89

Part IV.

     

Item 15.

   Exhibits and Financial Statement Schedules    89

 

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About This Form 10-K

 

The NASDAQ OMX Group, Inc. is a holding company created by the business combination of The Nasdaq Stock Market, Inc. and OMX AB (publ) which was completed on February 27, 2008. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in this business combination. As such, Nasdaq is the predecessor reporting entity of NASDAQ OMX and the results of operations of OMX are only included in NASDAQ OMX’s consolidated results of operations beginning February 27, 2008.

 

Throughout this Form 10-K, unless otherwise specified:

 

   

“NASDAQ OMX,” “we,” “us” and “our” refer to The NASDAQ OMX Group, Inc.

 

   

“Nasdaq” refers to The Nasdaq Stock Market, Inc., as that entity operated prior to the business combination with OMX AB.

 

   

The “NASDAQ Exchange,” “The NASDAQ Stock Market” and “NASDAQ” refer to the registered national securities exchange operated by The NASDAQ Stock Market LLC.

 

   

“OMX AB” refers to OMX AB (publ), as that entity operated prior to the business combination with Nasdaq.

 

   

“OMX” refers to OMX AB (publ) subsequent to the business combination with Nasdaq.

 

   

“NASDAQ OMX Nordic” refers to collectively, NASDAQ OMX Stockholm, NASDAQ OMX Copenhagen, NASDAQ OMX Helsinki and NASDAQ OMX Iceland.

 

   

“NASDAQ OMX Baltic” refers to collectively, NASDAQ OMX Tallinn, NASDAQ OMX Riga and NASDAQ OMX Vilnius.

 

   

“PHLX” refers to the Philadelphia Stock Exchange, Inc. and its subsidiaries, as that entity operated prior to its acquisition by NASDAQ OMX.

 

   

“NASDAQ OMX PHLX” refers to NASDAQ OMX PHLX, Inc. subsequent to its acquisition by NASDAQ OMX.

 

   

“SEK” or “Swedish Krona” refers to the lawful currency of Sweden.

 

   

“NOK” or “Norwegian Krone” refers to the lawful currency of Norway.

 

This Form 10-K includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Form 10-K for initial public offerings, or IPOs, is based on data generated internally by us, which includes best efforts underwritings and closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Form 10-K for secondary offerings for The NASDAQ Stock Market is based on data provided by Thomson Financial. Data in this Form 10-K for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings and issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. Data in this Form 10-K for IPOs and new listings of equities securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs, secondary offerings and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in “Item 1A. Risk Factors” in this Form 10-K.

 

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Forward-Looking Statements

 

The U.S. Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K contains these types of statements. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words or terms of similar substance used in connection with any discussion of future operating results or financial performance identify forward-looking statements. These include, among others, statements relating to:

 

   

our 2010 outlook;

 

   

the scope, nature or impact of acquisitions, dispositions, investments or other transactional activities;

 

   

the integration of acquired businesses, including accounting decisions relating thereto;

 

   

the effective dates for, and expected benefits of, ongoing initiatives;

 

   

the impact of pricing changes;

 

   

future tax benefits;

 

   

the cost and availability of liquidity; and

 

   

the outcome of any litigation and/or government investigation to which we are a party and other contingencies.

 

Forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following:

 

   

our operating results may be lower than expected;

 

   

loss of significant trading volume or listed companies;

 

   

economic, political and market conditions and fluctuations, including interest rate and foreign currency risk, inherent in U.S. and international operations;

 

   

government and industry regulation;

 

   

our ability to successfully integrate acquired businesses, including the fact that such integration may be more difficult, time consuming or costly than expected, and our ability to realize synergies from business combinations and acquisitions;

 

   

covenants in our credit facilities, indentures and other agreements governing our indebtedness which may restrict the operation of our business; and

 

   

adverse changes that may occur in the securities markets generally.

 

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are more fully described under the caption “Item 1A. Risk Factors,” in this Form 10-K. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 .

 

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Part I

 

Item 1. Business

 

Overview

 

We are a leading global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions.

 

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of December 31, 2009, The NASDAQ Stock Market was home to 2,852 listed companies with a combined market capitalization of approximately $4 trillion. In addition, in the U.S. we operate a second cash equities trading market, two options markets, a futures market and a derivatives clearinghouse.

 

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. In addition, we operate NASDAQ OMX Europe, a marketplace for pan-European blue chip trading based in the United Kingdom, NASDAQ OMX Commodities, an offering for trading and clearing commodities based in Norway, and NASDAQ OMX Armenia. In some of the countries where we operate exchanges, we also provide clearing, settlement and depository services.

 

Collectively, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies called NASDAQ OMX First North. As of December 31, 2009, the exchanges within NASDAQ OMX Nordic and NASDAQ OMX Baltic were home to 797 listed companies with a combined market capitalization of approximately $874 billion.

 

History and Structure

 

Nasdaq was founded in 1971 as a wholly-owned subsidiary of the Financial Industry Regulatory Authority, or FINRA (then known as the National Association of Securities Dealers, Inc.). Beginning in 2000, FINRA restructured and broadened ownership in Nasdaq by selling shares to FINRA members, investment companies and issuers listed on The NASDAQ Stock Market.

 

In connection with this restructuring, Nasdaq applied to the SEC to register The NASDAQ Stock Market as a national securities exchange. Prior to operating as an exchange, The NASDAQ Stock Market operated under an SEC-approved plan that provided a delegation of legal authority from FINRA to The NASDAQ Stock Market to operate as a stock market. FINRA fully divested its ownership of Nasdaq in 2006, and The NASDAQ Stock Market became fully operational as an independent registered national securities exchange in 2007. In 2006, Nasdaq also reorganized its operations into a holding company structure. As a result, our exchange licenses and exchange and broker-dealer operations are held by our subsidiaries.

 

On February 27, 2008, Nasdaq and OMX AB combined their businesses pursuant to an agreement with Borse Dubai Limited, a Dubai company, or Borse Dubai, and Nasdaq was renamed The NASDAQ OMX Group, Inc. Concurrently with the business combination with OMX AB, we also acquired a 33   1/3 % equity stake in NASDAQ Dubai Limited, or NASDAQ Dubai. In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. As part of this realignment, NASDAQ Dubai will become a wholly-owned subsidiary of Dubai Financial Market PJSC, or DFM, a publicly traded company controlled by Borse Dubai. NASDAQ OMX will receive a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai.

 

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In July 2008, we completed our acquisition of the Philadelphia Stock Exchange, Inc., or PHLX, expanding our presence in the derivatives market. PHLX, renamed NASDAQ OMX PHLX, Inc., operates as a distinct market alongside The NASDAQ Options Market, our options platform that was launched in March 2008. We closed the acquisition of the Boston Stock Exchange, Incorporated, or BSX, in August 2008. We used the BSX license to create a second U.S. cash equities market, called NASDAQ OMX BX, which was launched in January 2009. In October 2008, we acquired Nord Pool ASA’s, or Nord Pool’s, clearing, international derivatives and consulting subsidiaries. As a result of the acquisition, we launched NASDAQ OMX Commodities, which offers energy and carbon derivatives products.

 

In December 2008, we acquired a majority interest in the International Derivatives Clearing Group, or IDCG, and IDCG became an independently operated subsidiary of NASDAQ OMX. IDCG provides central counterparty, or CCP, clearing for interest rate swap products through its clearinghouse subsidiary, International Derivatives Clearinghouse, LLC, or IDCH. In January 2009, we acquired a 22% stake in European Multilateral Clearing Facility N.V., or EMCF, a leading European clearinghouse. In addition, we signed an agreement with EMCF to use its CCP services for all Nordic transactions. In December 2009, we entered into an agreement to increase our ownership interest in Agora-X, LLC, or Agora-X, to 85% resulting in a majority stake. Agora-X has developed an electronic communications network, or ECN, for over-the-counter, or OTC, contracts in the commodities market.

 

Competitive Strengths

 

Premier global exchange company. We are a premier global exchange company that is the largest cash equities market in terms of share value traded in the world. For the twelve months ended December 31, 2009, The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic had an average daily trading volume of 10.1 million trades in cash equities, representing a value of approximately $14.4 trillion. In addition, across our markets, we had 3,649 listings representing 44 countries as of December 31, 2009. We have many of the world’s largest companies listed on our marketplaces, with a leading market share of listings in the information technology, biotech and paper product industries. Our wholly-owned subsidiary The NASDAQ Stock Market continues to be the single largest liquidity pool for trading cash equities in the U.S.

 

Leader in global exchange technology. We believe we are the leader in global exchange technology. As the world’s first electronic stock exchange, we pioneered electronic trading and have continued to innovate over the last 30 years. Our INET platform processes trades at sub-millisecond transaction speeds with close to 100% system reliability. In addition, our platforms are highly scalable with current capacity at twice the level of daily peaks, allowing significantly higher transaction volume to be handled at low incremental cost. Furthermore, through OMX AB, we were the first exchange to offer electronic trading and integrated derivatives trading and clearing to other exchanges and today have a global technology customer base of more than 70 marketplaces in over 50 countries worldwide, including China (Hong Kong), Japan, Singapore, Australia and the U.S. Our new GENIUM ® offering, based on proven INET technology, is intended to provide technology customers with the speed, scale and reliability required to meet the specific needs of their markets. We believe that we will continue to provide leading technology for the world’s competitive and demanding capital markets, which increasingly require that exchanges be able to constantly secure the best price for investors and issuers, a natural strength of our technology and electronic trading platforms.

 

Diversified operations and products. We have a diversified business, both in terms of geography and product offerings. The acquisitions of OMX, PHLX and BSX, the strong derivatives exchange business of our options markets, the launch of NASDAQ OMX Commodities and our investments in IDCG, EMCF and Agora-X have significantly diversified our product offerings. In addition, our pan-European market, NASDAQ OMX Europe, and our offerings in derivatives clearing and settlement further diversify our business and enhance our growth opportunities in Europe.

 

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Proven and disciplined management team. We have a proven and disciplined management team that has substantial industry experience and expertise in making and integrating strategic acquisitions. Led by Robert Greifeld, our Chief Executive Officer, our executive management team has significant experience in the financial services industry. We believe the NASDAQ OMX management team has demonstrated an ability to innovate and respond effectively to market opportunities.

 

Commitment to regulatory integrity. As a global exchange company, we are subject to regulation in many jurisdictions worldwide. We are charged by regulators with maintaining fair and orderly markets for the benefit of investors, and we work to fulfill this obligation in several ways. In some instances, we have entered into agreements with independent third parties to provide regulatory oversight that is separate from our markets. In addition, we operate real-time market surveillance programs relating to trading and compliance-monitoring and enforcement programs with respect to listings on our markets. We are committed to strong and effective regulation and believe that regulatory integrity benefits investors, strengthens the NASDAQ OMX brand and attracts companies seeking to do business with us or to list securities on our markets.

 

Products and Services

 

We operate in three segments: Market Services, Issuer Services and Market Technology. Of our 2009 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,453 million, 67.0% was from our Market Services segment, 22.3% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.7% related to other revenues. Of our 2008 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,460 million, 67.5% was from our Market Services segment, 23.5% was from our Issuer Services segment, 8.2% was from our Market Technology segment and 0.8% related to other revenues. Of our 2007 revenues less liquidity rebates, brokerage, clearance and exchange fees of $812 million, 65.0% was from our Market Services segment and 35.0% was from our Issuer Services segment.

 

See Note 18, “Segments,” to the consolidated financial statements for additional financial information about our segments and geographic data.

 

Market Services

 

Our Market Services segment includes our U.S. and European Transaction Services businesses, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including equities, derivatives, debt, commodities, structured products and ETFs.

 

U.S. Transaction Services

 

In the U.S., we offer trading in equity securities, derivatives and ETFs on The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX BX and NASDAQ OMX Futures Exchange, or NFX. Our transaction-based platforms in the U.S. provide market participants with the ability to access, process, display and integrate orders and quotes for cash equities, derivatives and ETFs. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee-based revenues.

 

Equities Trading. The NASDAQ Stock Market is the largest single pool of liquidity for trading U.S.-listed cash equities, matching an average of approximately 21% of all U.S. equities volume for 2009.

 

In January 2009, we launched a second U.S. cash equities market, called NASDAQ OMX BX. With NASDAQ OMX BX, we offer a second quote within the U.S. equities marketplace, providing our customers enhanced trading choices and price flexibility. We have been able to leverage our INET trading system, which runs The NASDAQ Stock Market, to operate NASDAQ OMX BX, providing customers an additional fast and efficient cash equities market.

 

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Our fully electronic U.S. transaction-based platform provides members with the ability to access, process, display and integrate orders and quotes in cash equities on The NASDAQ Stock Market and NASDAQ OMX BX. Market participants include market makers, broker-dealers, alternative trading systems, or ATSs, and registered securities exchanges. These services are offered for NASDAQ-listed and non-NASDAQ-listed securities. Specifically, our platform:

 

   

Provides a comprehensive display of the interest by market participants at the highest price a participant is willing to buy a security (best bid) and also the lowest price a participant is willing to sell that security (best offer).

 

   

Provides subscribers quotes, orders and total anonymous interest at every price level for exchange-listed securities and critical data for the Opening Cross, Closing Cross, Halt Cross, IPO Cross and the Intraday Cross.

 

   

Provides anonymity to market participants, i.e., participants do not know the identity of the firm displaying the order unless that firm chooses to reveal its identity, which can contribute to improved pricing for securities by reducing the potential market impact that transactions by investors whose trading activity, if known, may influence others.

 

Later in 2010, we expect to launch a third U.S. cash equities market, called NASDAQ OMX PSX, pending SEC approval. This new market will utilize a price/size priority model and will run on INET technology, leveraging the speed and efficiency benefits offered throughout NASDAQ OMX globally.

 

Trade Reporting. All U.S. registered national securities exchanges and securities associations are required to establish a transaction reporting plan for the central collection of price and volume information concerning trades executed in those markets. Trades executed on The NASDAQ Stock Market and NASDAQ OMX BX are automatically reported under the appropriate transaction reporting plan. Currently, market participants are not charged for the reporting of most of these trades. The NASDAQ Stock Market and NASDAQ OMX BX, however, earn revenues for all of these trades in the form of shared market information revenues under the Unlisted Trading Privileges Plan, or the UTP Plan, for NASDAQ-listed securities and under the Consolidated Tape and Consolidated Quotation Plans for securities listed on the New York Stock Exchange, or NYSE, NYSE Amex and other exchanges.

 

Through The FINRA/NASDAQ Trade Reporting Facility, or FINRA/NASDAQ TRF, we collect reports of trades executed by broker-dealers outside of our exchanges. The FINRA/NASDAQ TRF collects trade reports as a facility of FINRA. A large percentage of these trades results from orders that broker-dealers have matched internally, or internalized, and is submitted to the FINRA/NASDAQ TRF for reporting purposes only. The FINRA/NASDAQ TRF does not charge market participants for locked in reporting of most trades, but it does earn shared market information revenues with respect to the trades. The FINRA/NASDAQ TRF also generates revenues by providing trade comparison to broker dealers by matching and locking-in the two parties to a trade that they have submitted to the FINRA/NASDAQ TRF for reporting and clearing.

 

In addition to trade reporting and trade comparison services, we provide clearing firms with risk management services to assist them in monitoring their exposure to their correspondent brokers.

 

U.S. Derivative Trading. With the acquisition of PHLX and the launch of The NASDAQ Options Market, we established our position in the U.S. marketplace for the trading of equity options, index options and currency options. The NASDAQ Options Market is designed to leverage our existing technology, customer connectivity and market structure. The acquisition of PHLX provided us with the third largest options market in the U.S. Renamed NASDAQ OMX PHLX, it operates a hybrid electronic and floor-based market as a distinct market alongside The NASDAQ Options Market. During 2009, NASDAQ OMX PHLX and The NASDAQ Options Market had an average combined market share of approximately 21% in the U.S. equity options market, consisting of approximately 18% at NASDAQ OMX PHLX and approximately 3% at The NASDAQ Options

 

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Market. Our options trading platforms provide trading opportunities to retail investors and high frequency trading firms, who tend to prefer electronic trading, and institutional investors, who typically pursue more complex trading strategies and often prefer to trade on the floor.

 

In the U.S., we also operate NFX which offers trading for currency futures and other financial futures. Most futures traded on NFX clear at The Options Clearing Corporation, or OCC. In addition, NFX serves as the designated contract market for interest rate swap products that are cleared through IDCH.

 

Through IDCH, our majority-owned subsidiary IDCG brings a centrally-cleared solution to the largest segment of the OTC derivatives marketplace, specifically interest rate derivatives. IDCH acts as the CCP for interest rate swap futures contracts. IDCH, in conjunction with Razor Risk Technologies, utilizes NASDAQ OMX matching and clearing technology to clear and settle derivative products.

 

European Transaction Services

 

Nordics. NASDAQ OMX Nordic’s operations comprise the exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland. The exchanges offer trading for equities and bonds and trading and clearing services for derivatives. Our platform allows the exchanges to share the same trading system which enables efficient cross-border trading and settlement, cross membership and a single source for Nordic market data.

 

Cash trading is offered in Nordic securities such as equities and depository receipts, warrants, convertibles, rights, fund units, ETFs, bonds and other interest-related products. NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen also offer trading in derivatives, such as stock options and futures, index options and futures, fixed-income options and futures and stock loans.

 

On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. The transactions are reported electronically prior to CCP clearing and we thereby guarantee the completion of the transaction. Following the completion of a transaction, settlement takes place between parties with the exchange of the securities and funds. The transfer of ownership is registered and the securities are stored on the owner’s behalf. Settlement and registration of cash trading takes place in Sweden, Finland, Denmark and Iceland via the local central securities depositories. Beginning in October 2009, most of our equity trades on the exchanges that comprise NASDAQ OMX Nordic are centrally cleared by EMCF, a leading European clearinghouse in which we own a 22% equity stake.

 

In 2009, NASDAQ OMX expanded its trading offering to include equities listed in Norway and launched a new portfolio of Norwegian derivatives products. The offering is designed to provide lower trading costs and other benefits for customers seeking to trade all Nordic equity products on one platform. NASDAQ OMX became the second largest market for trading in Norwegian stocks in 2009.

 

Baltics. NASDAQ OMX Baltic operations comprise the exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania). During the fourth quarter of 2009, we acquired additional ownership stakes in NASDAQ OMX Tallinn and NASDAQ OMX Vilnius. As of December 31, 2009, NASDAQ OMX holds a 93% ownership stake in both NASDAQ OMX Tallinn and NASDAQ OMX Riga and holds a 95% ownership stake in NASDAQ OMX Vilnius. In addition, we own a majority of the central securities depositories in Estonia and Latvia, and 40% of the central securities depository in Lithuania.

 

The exchanges that comprise NASDAQ OMX Baltic offer their members trading, clearing, payment and custody services. Issuers, primarily large local companies, are offered listing and a distribution network for their securities. The securities traded are mainly equities, bonds and treasury bills. Clearing, payment and custody

 

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services are offered through the central securities depositories in Estonia, Latvia and Lithuania. In addition, in Estonia and Latvia, NASDAQ OMX offers registry maintenance of fund units included in obligatory pension funds, and in Estonia, NASDAQ OMX offers the maintenance of shareholder registers for listed companies. The Baltic central securities depositories offer a complete range of cross-border settlement services.

 

Pan-European. NASDAQ OMX Europe is a marketplace designed for high performance trading of the most actively traded European stocks. It is the first platform to connect European liquidity pools with pan-European routing. As of December 31, 2009, NASDAQ OMX Europe traded 1,033 securities including constituents of the main European indexes, ETFs and other highly liquid securities.

 

Commodities Trading and Clearing. NASDAQ OMX Commodities, together with third party partner Nord Pool, provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. NASDAQ OMX Commodities offers international derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Nord Pool is responsible for exchange operations and trading activities, including ownership of Nordic derivatives products. NASDAQ OMX Commodities and Nord Pool have 388 members from 22 countries across a wide range of energy producers and consumers, as well as financial institutions. NASDAQ OMX Commodities’ offering is designed for banks, brokers, hedge funds and other financial institutions, as well as power utilities, industrial, manufacturing and oil companies. NASDAQ OMX Commodities offers clearing services for energy derivative and carbon product contracts by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for trades on the OTC derivative market subject to our approval on a case-by-case basis. Trading on the contracts can take place up until the delivery period which can occur over a period of up to six years

 

In January 2010, NASDAQ OMX Commodities and Nord Pool Spot launched N2EX, a marketplace for physical UK power contracts.

 

Access Services

 

We provide market participants with several alternatives for accessing our markets for a fee. Shifting connectivity from proprietary networks to third-party networks has significantly reduced technology and network costs and increased our systems’ scalability without affecting performance or reliability.

 

Our U.S. marketplaces may be accessed via a number of different protocols. The Financial Information Exchange product that uses the FIX protocol, a standard method of financial communication between trading firms and vendors, enables firms to leverage their existing FIX technology with cost-effective connections to our markets. Market participants may also access our systems using QIX, a proprietary programming interface that provides a more streamlined and efficient protocol for our users with expanded functionality, including quotation updates, and computer-to-computer interface, a protocol that allows market participants to enter transactions directly from their computer systems to our computer systems. Finally, firms may use former INET protocols, such as OUCH and RASH, to access our single trading platform. As an alternative to firm-developed trading front-end, our system offers the NASDAQ Workstation, an internet browser based interface that allows market participants to view market data and enter orders, quotes and trade reports.

 

We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also offer our customers memberships to our multiple exchanges for an annual and monthly fee.

 

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Market Data

 

We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products.

 

U.S. Tape Plans. The NASDAQ Stock Market operates as the exclusive Securities Information Processor of the UTP Plan for the collection and dissemination of best bid and offer information and last transaction information from markets that quote and trade in NASDAQ-listed securities. The NASDAQ Stock Market and NASDAQ OMX BX are participants in the UTP Plan and share in the net distribution of revenue according to the plan on the same terms as the other plan participants. In the role as the Securities Information Processor, The NASDAQ Stock Market collects and disseminates quotation and last sale information for all transactions in NASDAQ-listed securities whether traded on The NASDAQ Stock Market or other exchanges. We sell this information to market participants and to data distributors, who then provide the information to subscribers. After deducting costs associated with our role as an exclusive Securities Information Processor, as permitted under the revenue sharing provision of the UTP Plan, we distribute the tape fees to the respective UTP Plan participants, including The NASDAQ Stock Market and NASDAQ OMX BX, based on a formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape fees for information on NYSE- and NYSE Amex-listed securities.

 

U.S. Market Data Products. Our market data products enhance transparency and provide critical information to professional and non-professional investors. We collect, process and create information and earn revenues as a distributor of our market data. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Our systems enable distributors to gain direct access to our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We earn revenues primarily based on the number of data subscribers and distributors of our data.

 

We distribute this proprietary market information to both market participants and non-participants through a number of proprietary products. We use our broad distribution network of more than 1,800 market data distributors to deliver data regarding our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We offer a range of proprietary data products, including NASDAQ TotalView, our flagship market depth quote product. TotalView shows subscribers quotes, orders and total anonymous interest at every price level in The NASDAQ Stock Market for NASDAQ-listed securities and critical data for the Opening, Closing, Halt and IPO Crosses.

 

TotalView is offered through distributors to professional subscribers for a monthly fee per terminal and to non-professional subscribers for a lower monthly fee per terminal. We also offer a TotalView enterprise license to facilitate broad based distribution of this data to large audiences. In addition, we charge the distributor a monthly distributor fee.

 

We operate several other proprietary services and data products to provide market information, which include:

 

   

NASDAQ Basic, launched in 2009, which offers a flexible and affordable way to provide customers with essential trading data of best bid and offer and last sale information;

 

   

NASDAQ Last Sale, which provides broad based and universal access to real-time last sale information via internet portals;

 

   

NASDAQ Market Replay, a powerful replay and analysis tool that allows users to view order book and trade data for NASDAQ, NYSE- and NYSE Amex-listed securities at any point in time;

 

   

NASDAQ OMX DataStore, which is one aspect of NASDAQ OMX’s Web 2.0 initiative to transform the market data industry through use of plug-and-play technology to deliver new proprietary information content;

 

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Mutual Fund Quotation Service, a service for over 26,000 mutual funds, money market funds and unit investment trusts that supports fund data, including net asset values, and capital gains and dividend income distribution and provides print and electronic media exposure for the funds;

 

   

Mutual Fund Dissemination Service, which is a service that facilitates the real-time and end-of-day recap dissemination of all mutual fund pricing information and is used by data vendors and media to receive complete net asset value data on funds;

 

   

Global Index Dissemination Service, released in 2009, which is a real-time data feed that carries the values for a number of broad-based and sector indexes and ETFs; and

 

   

NASDAQ OMX Trader.com, a financial website that provides broker-dealers and market data vendors with information and data regarding our corporate initiatives (such as Open, Closing, Halt and IPO Crosses) and other products and services for a monthly subscription fee.

 

European Market Data Products. The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer European market data products and services. These products and services provide critical market transparency to professional and non-professional investors who participate in European marketplaces and, at the same time, give investors greater insight into these markets.

 

European market data products and services are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic for three classes of securities: equities, bonds and derivatives. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based and are generated primarily based on the number of data subscribers and distributors of our data.

 

We provide a wide range of data products including products in real-time, some with a time delay or in batch delivery. These products and services are packaged for market professionals as well as for private individuals, and include real-time information on market depth, specific transactions and share-price trends, the compilation and calculation of reference information such as indexes and the presentation of statistics.

 

Significant European market data products include:

 

   

Nordic Equity TotalView provides full market insight, with 20 level order book, news and analysis data for all Nordic equities. The product also includes index values and weights and liquidity measure indicators;

 

   

Nordic Derivative Level 2 provides listing details, trade information, derived information and order book information with the five best levels of bid and ask prices with the respective total quantity;

 

   

Nordic Fixed Income Level 2 provides listing details, order book information, bid and ask quotes for up to five levels, trade information, derived information, indicative bid and ask quotes, daily turnover statistics and company disclosures;

 

   

Corporate Action and Accounting Data; and

 

   

European Last Sale, launched in 2008 (along with the NASDAQ Last Sale Product in the U.S.), to provide broad based and universal access to real-time last sale information via internet portals.

 

Broker Services

 

Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. Broker Services provides services through a registered securities company which is regulated by the Swedish Financial Supervisory Authority, or SFSA. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company’s back-office functions.

 

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We offer customer and account registration, business registration, clearing and settlement, corporate action handling for reconciliations and reporting to authorities. Available services also include direct settlement with the Nordic central securities depositories, real-time updating and communication via the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, to deposit banks.

 

In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse.

 

Issuer Services

 

Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. We offer capital raising solutions to companies around the globe and have more worldwide listings than any other global exchange group—over 3,600 companies representing approximately $4.9 trillion in total market value as of December 31, 2009.

 

We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai.

 

Global Listing Services

 

Our Global Listing Services business includes our U.S. Listings, European Listings and Corporate Services businesses.

 

U.S. Listings. Companies listed on The NASDAQ Stock Market represent a diverse array of industries including health care, consumer products, telecommunication services, information technology, financial services, industrials and energy.

 

Companies seeking to list securities on The NASDAQ Stock Market must meet minimum listing requirements, including specified financial and corporate governance criteria. Once listed, companies must meet continued listing standards. The NASDAQ Stock Market currently has three listing tiers: The NASDAQ Global Select Market, The NASDAQ Global Market and The NASDAQ Capital Market. All three market tiers maintain rigorous listing and corporate governance standards (both initial and ongoing) and issuers listing on these markets have the opportunity to leverage an array of NASDAQ OMX corporate services.

 

As of December 31, 2009, a total of 2,852 companies listed securities on The NASDAQ Stock Market, with 1,310 listings on The NASDAQ Global Select Market, 1,062 on The NASDAQ Global Market and 480 on The NASDAQ Capital Market.

 

We aggressively pursue new listings from companies, including those undergoing IPOs as well as companies seeking to switch from alternative exchanges. In 2009, The NASDAQ Stock Market attracted 131 new listings. Included in these listings were 33 IPOs, almost 49% of the total U.S. IPOs in 2009. The new listings were comprised of the following:

 

New Listings on The NASDAQ Stock Market

   131

Switches from NYSE/NYSE Amex

   24

IPOs

   33

Upgrades from OTC

   47

ETFs, Structured Products and Other Listings

   27

 

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In 2009, the following ten NYSE-listed companies switched to The NASDAQ Stock Market, representing $154 billion in market capitalization: BMC Software, Inc., Cypress Semiconductor Corporation, Dreamworks Animation SKG, Inc., Mattel, Inc., Micron Technology, Inc., Network Equipment Technologies, Inc., R.R. Donnelley & Sons Company, TriMas Corporation, Vodafone Group Plc and Windstream Corporation. A total of 14 companies switched from NYSE Amex to The NASDAQ Stock Market in 2009.

 

There are three types of fees applicable to companies that list on The NASDAQ Stock Market: an annual renewal fee, a listing of additional shares fees and an initial listing fee. Annual renewal fees for securities listed on The NASDAQ Stock Market are based on total shares outstanding. The fee for listing of additional shares is also based on the total shares outstanding, which we review quarterly, and the initial listing fee for securities listed on The NASDAQ Stock Market includes a listing application fee and a total shares outstanding fee.

 

European Listings. We also offer listings on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. As of December 31, 2009, a total of 797 companies listed securities on our Nordic and Baltic exchanges. Measured in terms of the market capitalization of listed companies, as of December 31, 2009, NASDAQ OMX Nordic was the largest marketplace in Europe for IT companies, the largest marketplace in the world for the paper industry, the second largest marketplace in the world for apparel retail and third largest marketplace in the world for industrial machinery.

 

Revenues are generated through annual fees paid by companies listed on these exchanges, which are measured in terms of the listed company’s market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period. Our European listing customers are organizations such as companies, funds or governments that issue and list securities on the exchanges of NASDAQ OMX Nordic and NASDAQ OMX Baltic. Customers issue securities in the forms of equities, depository receipts, warrants, ETFs, convertibles, rights, options, bonds and fixed-income related products. In 2009, a total of 12 new companies were listed on our Nordic and Baltic exchanges.

 

For smaller companies and growth companies, we offer access to the financial markets through the NASDAQ OMX First North alternative marketplaces. NASDAQ OMX First North added five new companies in 2009.

 

Corporate Services. Our Corporate Services business provides customer support services, products and programs to companies, including companies listed on our exchanges. Through our Corporate Services offerings, companies gain access to innovative products and services that ease transparency, mitigate risk, maximize board efficiency and facilitate better corporate governance. Through our wholly-owned subsidiaries, we provide corporate services in key areas of focus:

 

   

Investor Relations . We provide industry-leading investor relations and news distribution products designed to make it easier for companies to interact and communicate with analysts and investors while meeting corporate governance and disclosure requirements.

 

   

Market Monitoring . We offer unique proprietary services that help companies monitor their stock and track peer performance. In November 2008, we acquired Bloom Partners, a leading market intelligence firm, enhancing our market monitoring services.

 

   

Board Practice . We offer board member recruiting and management solutions to ensure board member effectiveness.

 

   

Global Visibility. We provide ways for companies to increase their visibility through our Marketsite offerings and access to discounts and special offers from other listed companies.

 

In October 2009, we sold substantially all of our Carpenter Moore insurance agency business. We sold certain assets of the western region direct practice insurance brokerage business to Woodruff-Sawyer & Co. and, we sold the eastern region insurance brokerage business to Aon Risk Services Companies, Inc.

 

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PORTAL and The PORTAL Alliance. In addition to traditional public offerings, SEC Rule 144A provides public and private companies with another option for effectively raising capital at a lower cost and with fewer regulatory hurdles. We have managed the process to designate SEC Rule 144A unregistered securities as PORTAL securities since 1990.

 

In 2009, we and a group of leading securities firms launched The PORTAL Alliance, an open, industry-standard 144A equity trading platform with the goal of providing a better market for investors and issuers. The PORTAL Alliance members intend to develop a neutral process for investor qualification and tracking of transaction settlement and dissemination of issuer and trading information for Rule 144A securities.

 

Global Index Group

 

We are one of the world’s leading index providers. We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. We believe that these indexes and products leverage, extend and enhance the NASDAQ OMX brand. License fees for our trademark licenses vary by product based on a percentage of underlying assets, dollar value of a product issuance, number of products or number of contracts traded. In addition to generating licensing revenues, these products, particularly mutual funds and ETFs, lead to increased investments in companies listed on our global exchanges, which enhances our ability to attract new listings. We also license cash-settled options, futures and options on futures on our indexes.

 

Our flagship index, the NASDAQ-100 Index, includes the top 100 non-financial securities listed on The NASDAQ Stock Market. With the addition in 2008 of OMX and PHLX, we now have 1,500 diverse indexes, with 78 launched in 2009. NASDAQ OMX indexes are the basis for over 1,800 structured products in 39 countries. In 2009, product sponsors launched 8 new ETFs based on NASDAQ OMX indexes. We also license cash-settled options, futures and options on futures on our indexes.

 

Market Technology

 

Powering more than 70 markets in over 50 countries, we are the world’s leading technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Our technology business is also the sales channel for our complete global offering to other marketplaces. The global offering includes trading, clearing, listings, corporate, market data and index services.

 

Technology Solutions. The systems solutions we offer support trading, clearing and settlement and information dissemination for many types of instruments, ranging from equities to complex derivative products. Furthermore, the solutions we offer can handle all classes of assets, including currencies, different types of interest-bearing securities, commodities and energy products.

 

NASDAQ OMX’s technology solutions are utilized by, among others, the Australian Securities Exchange, Bolsa de Valores de Colombia, Egypt Stock Exchange, Hong Kong Exchanges and Clearing, Plus Markets Group, SIX Swiss Exchange, Singapore Exchange and Tokyo Commodity Exchange.

 

Our trading and market data solutions are utilized by exchanges, alternative-trading venues and banks and securities brokers with marketplace offerings of their own. In the post trade stage, we offer integrated systems solutions for clearing (risk management) and settlement (settlement and delivery) of both cash equities and derivatives to clearing organizations around the world.

 

Systems Integration, Operation and Support. A central part of many projects is facility management and systems integration. Through our integration services, we can assume total responsibility for projects involving migration to a new system and the establishment of entirely new marketplaces. We also offer operation and support for the applications, systems platforms, networks and other components included in a turn-key

 

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information technology solution. By transferring the operation and support of systems to us, the customer can focus on its core operations and reduce its operational risk level. At the same time, economies of scale can be achieved, by allowing the customer access to existing, effective technology and infrastructure.

 

Advisory Services. Our advisory services are designed to support our customers’ strategies and help them with critical decisions in a highly demanding business environment. Operating our own exchanges and partnering with global marketplaces, we continually gain insight on developments in the financial world. We understand first-hand how marketplaces operate, the challenges they face and the complex technology infrastructures that support them. Our consultants have deep experience in strategy, operations and change management, and are backed by the combined knowledge of NASDAQ OMX as well as a network of external experts in the exchange industry.

 

Core Technology. Technology plays a key role in ensuring the growth and reliability of financial markets. At NASDAQ OMX, we are committed to innovation through technology to ensure our position as a driving force in the exchange industry and to provide the best possible trading experience for our customers and investors. Investment decisions are made based on customer needs and general market trends.

 

We continuously improve our core technology with a focus on reducing latency and improving capacity and reliability. NASDAQ OMX’s next generation technology is capable of handling over 1 million messages per second at an average speed of sub-250 microseconds, currently the fastest of any exchange or alternative trading system in the world. A concrete example of our continuous improvement efforts is that in 2009 we reduced latency by over 40% for The NASDAQ Stock Market.

 

The foundation for NASDAQ OMX’s core technology is INET. The INET technology is used across NASDAQ OMX’s U.S. and European markets. INET is also the main building block of our new Market Technology offering, GENIUM. INET and GENIUM combine innovative functionality with a modular approach to manage change and create new advantages for existing and new customers, as well as our own marketplaces.

 

Intellectual Property

 

We own or have licensed rights to trade names, trademarks, domain names and service marks that we use in conjunction with our operations and services. We have registered many of our most important trademarks in the United States and in foreign countries. For example, our primary “NASDAQ” mark is a registered trademark in the United States and in over 50 other countries worldwide and the OMX trademark also has been registered worldwide. We also have trademark registrations for the most important names of NASDAQ OMX Nordic and our operations in Europe. Many of these trademarks are registered in a number of countries. An example of the registered trademarks used in our European operations include: OMX, GENIUM, SECUR, CLICK XT and EXIGO.

 

We also maintain copyright protection in our NASDAQ-branded materials and pursue patent protection for NASDAQ OMX-developed inventions and processes. We focus on gaining patent protection for the software functionality that we develop in order for us to fully benefit from our research and development investments. We accomplish this through the evaluation of inventions, the preparation, filing and prosecution of patent applications for inventions deemed worthwhile to pursue, the maintenance of granted patents, the coordination of information within the organization about patents and the monitoring of competitors for possible use of patented information.

 

Competition

 

Market Services. The equity securities markets are intensely competitive. We compete in the U.S. against NYSE Euronext, BATS Exchange, regional exchanges and ATSs. In Europe, our major competitors include NYSE Euronext, Deutsche Börse, the London Stock Exchange Group plc, or LSE, the Spanish Exchanges, SIX

 

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Swiss Exchange, and Multilateral Trading Facilities, or MTFs, which are similar to U.S. ATSs. Competition also comes from broker-dealers and from off-board or OTC trading in the U.S. and elsewhere.

 

In bond trading, we compete in Europe with alternative marketplaces such as EuroMTS Limited. For derivatives products, competition comes in the form of trading and clearing that takes place OTC, usually through banks and brokerage firms, or through trading and clearing competition with other exchanges. The competitive significance in Europe of these varied alternative trading venues is likely to increase in the future, with the regulatory environment in Europe becoming more favorable to alternative trading venues as a result of the reforms required by the Markets in Financial Instruments Directive, or MiFID, and a broader effort to increase competition in financial services.

 

Competition is based on a number of factors, including the quality of our technological and regulatory infrastructure, total transaction costs, the depth and breadth of liquidity, the quality of value-added customer services, reputation and cost of trade execution.

 

Equity securities trading. The U.S. marketplace continues to evolve as ATSs active in the equity trade execution business attract market participants’ investment and become exchanges or acquire regional exchanges. Additional new entrants continue to emerge, potentially posing a competitive threat to more established industry participants. While many of the new entrants may have limited liquidity, some may attract significant levels of equity order volume through aggressive pricing and from volume originating with broker-dealer owners and investors. Broker-dealer owned systems in particular experienced rapid growth during 2009. In addition, there remains interest in electronic trading systems specializing primarily in large block trades, such as LiquidNet, Pipeline Trading and Investment Technology Group’s POSIT platform. Also, a regional exchange, the ISE Stock Exchange, has been acquired by the Direct Edge ATS, with the objective of enabling them to better compete with other exchanges. New exchanges continue to be created. Direct Edge has filed exchange applications for both of the ATS platforms it operates and the BATS exchange is also expected to launch a second exchange in 2010. Finally, the SEC published a concept release early in 2010 that could result in significant changes in the competitive landscape.

 

The European landscape is continuing to adapt to the competitive forces released by MiFID in November 2007. Throughout Europe new MTFs have been created with the most prominent equity MTFs (Chi-X, Turquoise, NASDAQ OMX Europe, and BATS) based in the United Kingdom and attracting a significant share of electronically matched volume. Aggressive pricing by Chi-X during 2009 enabled them to grow their business in shares listed on our Nordic exchanges. Trade reporting alternatives to incumbent exchanges, such as Markit BOAT, or BOAT, continue to be active. In 2009, BOAT maintained its 2008 position as the largest market trade reporting platform in Europe. Electronic trading systems interested in pursuing block business have long been active in Europe and are looking to grow their businesses. In the Nordics, a new MTF, Burgundy launched in 2009 and plans to expand its business in 2010. These entrants pursue many of the same strategies to attract order flow as do ATSs in the U.S., which include attractive pricing, participant investment, technological innovation, and pursuit of exchange status. Because of the success of the new entrants, incumbent exchanges have lowered prices, adopted new technology, and prepared to compete aggressively for trading volumes and revenue. While the state of competition in Europe remains evolutionary, the level of competition faced by incumbent national exchanges will remain intense.

 

As a result of the conditions in the U.S. and Europe, we experience competition in our core trading activities such as execution services, quoting and trading capabilities, and reporting services. Many of our competitors have engaged in aggressive price competition by reducing the trade execution transaction fees they charge their customers. As a result of this competition, we significantly reduced the trade execution transaction fees we charge our customers in the past, particularly our large-volume customers. We periodically reexamine our pricing structure to ensure that our fees remain competitive.

 

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Derivatives. Our principal competitors for trading options in the U.S. include the Chicago Board Options Exchange, or CBOE, the International Securities Exchange, or ISE, NYSE ARCA, NYSE Amex and the Boston Options Exchange, or BOX. Competition is focused on providing market participants with greater functionality, trading system stability, customer service, efficient pricing, and speed of execution. NASDAQ OMX operates two options exchanges with different market structures. NASDAQ OMX PHLX operates a pro-rata hybrid electronic and floor based exchange and competes most directly with CBOE, ISE and NYSE Amex. The NASDAQ Options Market operates a price/time priority exchange and competes most directly with NYSE ARCA and BOX. The NASDAQ Options Market competes primarily by providing meaningful price improvement to incoming orders and by offering a fast, stable trading system. During 2009, NASDAQ OMX PHLX re-platformed its options technology using the PHLX XL II system based on INET which resulted in significant speed improvements for the exchange. We deployed a number of other systems enhancement to both our options markets during the year to strengthen their positions in the market place. One significant competitive initiative in 2009 was the partial re-mutualization of NYSE Amex options which contributed to a significant growth in market share for that exchange. Also, both BATS and the CBOE announced plans to launch new options exchanges planned for 2010. The further intensifying of competition for exchange traded options means that we must continuously review our technology and pricing.

 

MiFID does not address competition between derivatives markets to the extent that it addresses equities trading and consequently has been slower to affect competition in trading derivative securities. Exchange based competition for trading in European derivatives continues to occur mainly where there is competition in trading for the underlying equities and our competition for options on European equities is primarily with EUREX, LIFFE, EDX and, to a limited extent, the U.S. options exchanges. Such competition is limited to options on a small number of equity securities although these securities tend to be among the most active.

 

In addition to exchange based competition in derivatives we continue to face competition from OTC derivative markets. Bilateral and CCP-like innovations such as NYSE Euronext’s Bclear and The Order Machine (TOM)—which is a collaboration between two of the Dutch market’s largest providers of liquidity—are also creating increasing competition for derivatives, mainly in the OTC and covered warrants markets. We market NASDAQ OMX’s market operations, and trading and clearing services to these new entrants.

 

As trading in Europe evolves under MiFID, competition for trading volumes in derivatives will likely increase. Both current and potential competition requires us to constantly reassess our pricing and product offerings in order to remain competitive.

 

Clearing. In both the U.S. and Europe, cash equity clearing has been organized along national lines. Typically, a single clearinghouse would serve essentially all equity trading involving securities listed on exchanges within a nation’s borders. Some countries, such as Sweden, did not have a clearinghouse at all until 2009. In some countries such as the U.S., the clearinghouse is part of the same organization as the Central Securities Depository, or CSD. In some, such as Germany, the clearinghouse and the stock exchange are part of the same corporate structure, and in others such as the U.K., the clearinghouse, exchange, and CSD are separate. Furthermore, there is a much shorter history of using CCP services in European clearing than in the U.S. Regardless of past practice, competition is beginning to come to clearing in response to the European Code of Conduct in Clearing and Settlement in Europe and initiatives by NASDAQ OMX in the U.S. At this time, competition in clearing remains limited with a few new non-national clearinghouses such as EMCF, X-Clear and EuroCCP serving non-national multilateral trading facilities or offering alternative clearing facilities for trades executed on incumbent exchanges. In 2009, the NASDAQ OMX Nordic exchanges successfully introduced a non-national CCP, operated by EMCF, to our markets in order to further spur competition for clearing services in Europe.

 

In the U.S., competition in equity clearing has been legislatively called for since 1975 but only recently have technological advances made competitive clearing in the U.S. a viable possibility. Should clearing competition become a vibrant reality in the U.S., it may have an impact on equity trading and on our business as clearing is a

 

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non-trivial cost of trade execution. We believe that clearing in the U.S. will benefit from competition and intend to compete actively for clearing business. In Europe, we also believe that competition for clearing will benefit the market, and therefore, even as a 22% equity owner of EMCF, one of the largest equities clearinghouses in Europe, we support interoperability of cash equities clearinghouses, which will foster a healthy competition among equity clearinghouses in Europe.

 

Market data services. Our revenues from the sale of market data products and services are under competitive threat from other securities exchanges that trade NASDAQ-listed securities. Current SEC regulations permit these regional exchanges and FINRA’s Alternative Display Facility to quote and trade NASDAQ-listed securities. Trade reporting facilities regulated by FINRA are also operated by The NASDAQ Stock Market and other exchanges. The UTP Plan entitles these exchanges, FINRA’s Alternative Display Facility, and the trade reporting facilities to a share of UTP Plan tape fees, based on the formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, The NASDAQ Stock Market similarly competes for the tape fees from the sale of information on NYSE- and NYSE Amex-listed securities for those respective tape plans.

 

Participants in the tape plans have used tape fee revenues to establish payment for order flow arrangements with their members and customers. In January 2004, we implemented a new tiered pricing structure and the Nasdaq General Revenue Sharing Program, which provided incentives for quoting market participants to send orders and report trades to The NASDAQ Market Center. We continuously evaluate and refine both programs. To remain competitive, in July 2006, we changed the terms of the program and established a new Nasdaq Data Revenue Sharing Program. In January 2008, we again changed the terms of the program. We may adjust either program in the future to respond to competitive pressures.

 

The sale of our proprietary products are under competitive threat from alternative exchanges and trading venues that offer similar products at a lower price or free of charge. Our market data business competes with other exchanges and third party vendors in providing information to market participants. Consequently our data products must be competitive in speed, reliability, content and price to succeed in the marketplace. New exchanges and trading systems entering the market have recognized the strong connection between market data and transactions volume and new entrants could price their market data very aggressively in order to grow transactions volume, thereby limiting our flexibility in pricing market data. Any action by a market participant to provide information to another exchange or market data vendor could have a negative impact on our data products. The market data business must also adapt to rapidly changing information delivery technologies and constantly invest in innovative product design and development. Other market data providers may not face the regulatory obligations we face and may consequently be more flexible in pricing and more agile in deploying new products and business methods to our detriment. The growth of the number of proprietary data feeds offered by NASDAQ OMX and other exchanges has also increased the reluctance of some data vendors to add new feeds to their product offerings which further complicates exchanges’ efforts to expand their market data offerings.

 

Listings. Our primary competitor for larger company listings in the U.S. on The NASDAQ Stock Market is the NYSE. The NASDAQ Stock Market also competes with NYSE Amex for listing of smaller companies and the BATS exchange has recently announced it intends to compete for listings in 2010.

 

Competition for listings in Europe relates to the choices available to companies considering a new or secondary listing. In addition to the larger exchanges, companies are able to consider smaller markets and quoting facilities, such as LSE’s Alternative Investment Market, Euronext’s Alternext, Deutsche Börse’s Entry Standard, Borsa Italiana’s Expandi Market, PLUS Markets plc, the Pink Sheets LLC and the Over-the-Counter Bulletin Board, or OTCBB. Other exchanges in Sweden include the Nordic Growth Market and Aktietorget, which primarily serve companies with smaller market capitalizations.

 

Indexes. The NASDAQ Stock Market is subject to intense competition for the listing of financial products from other exchanges. The indexes on which these products are based face competition from other indexes which

 

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can be considered competitive with NASDAQ OMX indexes. For example, there are a number of indexes that aim to track the technology sector and may from time to time have a high degree of correlation with the NASDAQ-100 Index and the NASDAQ Composite Index. We face competition from investment banks, markets or other product developers in designing products that meet investor needs.

 

Market Technology. Many exchanges, clearing organizations and securities depositories have traditionally developed their own technology systems for trading, clearing, settlement, depository and information dissemination internally, often assisted by consulting companies and local suppliers of components. The competitive landscape is changing and the implementation of third party solutions is growing more popular. Two types of competitors are emerging: other exchanges providing solutions, including NYSE Euronext and LSE, and pure technology providers focused on the exchange industry.

 

Regulation

 

We are subject to extensive regulation in the United States and Europe.

 

U.S. Regulation

 

U.S. federal securities laws establish a two-tiered system for the regulation of securities markets, market participants and listed companies. The SEC occupies the first tier and has primary responsibility for enforcing the federal securities laws. Self-Regulatory Organizations, or SROs, which are non-governmental organizations, occupy the second tier. SROs, such as national securities exchanges, are registered with the SEC and are subject to the SEC’s extensive regulation and oversight.

 

This regulatory framework applies to our U.S. business in the following ways:

 

   

regulation of our registered national securities exchanges; and

 

   

regulation of our U.S. broker-dealer subsidiaries.

 

The rules and regulations that apply to our business are focused primarily on safeguarding the integrity of the securities markets and of market participants and investors generally. These rules and regulations are not focused on the protection of our stockholders, although we believe that regulation improves the quality of exchanges and, therefore, our company. U.S. federal securities laws and the rules that govern our operations are subject to frequent change.

 

Regulation of U.S. Exchanges. SROs in the securities industry are an essential component of the regulatory scheme of the Securities Exchange Act of 1934, or the Exchange Act, for providing fair and orderly markets and protecting investors. The Exchange Act and the rules thereunder impose on the SROs many regulatory and operational responsibilities, including the day-to-day responsibilities for market and broker-dealer oversight. In general, an SRO is responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members.

 

With the registration of The NASDAQ Stock Market as a national securities exchange in 2006, we received our own SRO status through our exchange subsidiary, separate from that of FINRA. With the acquisitions of the Philadelphia Stock Exchange and the Boston Stock Exchange, we acquired additional SRO licenses. As SROs, each entity has separate rules pertaining to its broker-dealer members and listed companies. Broker-dealers that choose to become members of The NASDAQ Stock Market, NASDAQ OMX PHLX, and/or NASDAQ OMX BX are subject to the rules of those exchanges. Broker-dealers may also choose other SRO memberships, including membership in FINRA.

 

All of our U.S. national securities exchanges are subject to SEC oversight, as prescribed by the Exchange Act, including periodic and special examinations by the SEC. Our exchanges also are potentially subject to

 

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regulatory or legal action by the SEC or other interested parties at any time in connection with alleged regulatory violations. We are also subject to Section 17 of the Exchange Act, which imposes record-keeping requirements, including the requirement to make records available to the SEC for examination. We have been subject to a number of routine reviews and inspections by the SEC or external auditors in the ordinary course and because of settlements with the SEC. To the extent such actions or reviews and inspections result in regulatory or other changes, we may be required to modify the manner in which we conduct our business, which may adversely affect our business.

 

Section 19 of the Exchange Act provides that our exchanges must submit to the SEC proposed changes to any of the SROs’ rules, practices and procedures, including revisions to provisions of our certificate of incorporation and by-laws that constitute SRO rules. The SEC will typically publish the proposal for public comment, following which the SEC may approve or disapprove the proposal, as it deems appropriate. The SEC’s action is designed to ensure that applicable SRO rules and procedures are consistent with the aims of the Exchange Act and its rules and regulations. In addition, pursuant to the requirements of the Exchange Act, our exchanges must file all proposals to change their pricing structure with the SEC.

 

NASDAQ OMX currently operates two equities and two options markets in the United States. We operate The NASDAQ Stock Market and The NASDAQ Options Market pursuant to The NASDAQ Stock Market’s SRO license, the NASDAQ OMX BX equities market, launched in January 2009, pursuant to the NASDAQ OMX BX SRO license, and the NASDAQ OMX PHLX options market pursuant to the NASDAQ OMX PHLX SRO license. In addition, NASDAQ OMX BX regulates the BOX Market, pursuant to a regulatory services agreement between a subsidiary of NASDAQ OMX BX and BOX. NASDAQ OMX does not have an ownership interest in BOX, and BOX compensates NASDAQ OMX BX based on the cost of the regulatory services provided to BOX.

 

FINRA provides regulatory services to the equities and options markets of The NASDAQ Stock Market and the markets operated or regulated by NASDAQ OMX PHLX and NASDAQ OMX BX, including the regulation of trading activity and surveillance and investigative functions. We have a limited direct regulatory role in conducting real-time market monitoring, certain options surveillance, rulemaking and some membership functions through our MarketWatch department. We refer suspicious trading behavior discovered by our regulatory staff and all other employees of The NASDAQ Stock Market and the markets operated and regulated by NASDAQ OMX PHLX and NASDAQ OMX BX to FINRA for further investigation.

 

Broker-dealer regulation. NASDAQ OMX’s broker-dealer subsidiaries are subject to regulation by the SEC, the SROs and the various state securities regulators. Nasdaq Execution Services, LLC currently operates as our routing broker for sending orders from The Nasdaq Stock Market to other venues for execution. NASDAQ Options Services, LLC performs a comparable function with respect to routing of orders from The NASDAQ Options Market and NASDAQ OMX PHLX.

 

Nasdaq Execution Services is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and Puerto Rico. It is also a member of The NASDAQ Stock Market, NASDAQ OMX BX, NASDAQ OMX PHLX, NYSE, NYSE Amex, NYSE Arca, FINRA, BATS Exchange, CBOE, Chicago Stock Exchange, ISE and the National Stock Exchange.

 

NASDAQ Options Services is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and Puerto Rico. It is also a member of The NASDAQ Stock Market, NASDAQ OMX PHLX, FINRA, NYSE Amex, BOX, ISE and NYSE Arca.

 

The SEC, NYSE and FINRA adopt rules and examine broker-dealers and require strict compliance with their rules and regulations. The SEC, SROs and state securities commissions may conduct administrative proceedings which can result in censures, fines, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its officers or employees. The SEC and state regulators may also institute

 

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proceedings against broker-dealers seeking an injunction or other sanction. The SEC and SRO rules cover many aspects of a broker-dealer’s business, including capital structure and withdrawals, sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, record-keeping, the financing of customers’ purchases, broker-dealer and employee registration and the conduct of directors, officers and employees. All broker-dealers have an SRO that is assigned by the SEC as the broker-dealer’s designated examining authority, or DEA. The DEA is responsible for examining a broker-dealer for compliance with the SEC’s financial responsibility rules. FINRA is the current DEA for both Nasdaq Execution Services and NASDAQ Options Services.

 

As registered broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services are subject to regulatory requirements intended to ensure their general financial soundness and liquidity, which requires that they comply with certain minimum capital requirements. The SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria, dictate the ratio of debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the Uniform Net Capital Rule and FINRA rules impose certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC and FINRA for certain withdrawals of capital.

 

As of December 31, 2009, we were in compliance with all of such capital requirements.

 

Regulatory contractual relationships with FINRA. The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX and NASDAQ OMX BX have signed a series of regulatory service agreements covering the services FINRA provides to the respective SROs, including some of the regulatory services we perform for BOX. Under these agreements, FINRA personnel act as our agents in performing the regulatory functions outlined above, and FINRA bills us a fee for these services. These agreements have enabled us to reduce our headcount while ensuring that the markets for which we are responsible are properly regulated. However, our SROs retain ultimate regulatory responsibility for all regulatory activities performed under these agreements by FINRA. In addition, our options markets have entered into a joint agreement with the other options exchanges for conducting insider trading surveillance. Our SROs continue to monitor the activities conducted under the agreement and continue to have regulatory responsibility in this area.

 

Exchange Act Rule 17d-2 permits SROs to enter into agreements, commonly called Rule 17d-2 agreements, approved by the SEC with respect to enforcement of common rules relating to common members. Our SROs have entered into several such agreements under which we are relieved of regulatory responsibility:

 

   

agreements with FINRA covering the enforcement of common rules, the majority of which relate to the regulation of The NASDAQ Stock Market, NASDAQ OMX BX and the members of these exchanges;

 

   

joint industry agreements with FINRA and NYSE Regulation covering responsibility for enforcement of insider trading rules;

 

   

joint industry agreement with FINRA covering enforcement of rules related to equity sales practices and certain other non-market related rules; and

 

   

joint industry agreement covering enforcement of rules related to options sales practices.

 

Regulation NMS and Options Intermarket Linkage Plan. We are subject to Regulation NMS for our cash equities markets, and our options markets have joined the Options Intermarket Linkage Plan. These are designed to facilitate the routing of orders among exchanges to create a national market system as mandated by the Exchange Act. One of the principal purposes of a national market system is to assure that brokers may execute investors’ orders at the best market price. Both Regulation NMS and the Options Intermarket Linkage Plan require that exchanges avoid trade-throughs, locking or crossing of markets and provide market participants with electronic access to the best prices among the markets for the applicable equity or options order.

 

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CFTC Regulation. With the acquisition of PHLX, we also acquired its subsidiary, NASDAQ OMX Futures Exchange, Inc. (formerly the Philadelphia Board of Trade), a designated contract market under the Commodity Exchange Act. As a designated contract market, NFX is subject to regulatory oversight by the U.S. Commodity Futures Trading Commission, or CFTC, an independent agency with the mandate to regulate commodity futures and option markets in the U.S. NFX currently lists trading futures contracts on stock indexes, foreign currencies and interest rate swaps. The National Futures Association, or NFA, provides certain regulatory services to NFX pursuant to a Regulatory Services Agreement. The CFTC also regulates IDCH, a derivatives clearing organization under the Commodity Exchange Act that is wholly owned by IDCG. IDCH clears interest rate swap futures contracts listed by NFX. NFA also provides regulatory services to IDCH.

 

European Regulation

 

Recent directives from the European Union have focused on harmonizing regulation with respect to financial services, listing and trading of securities and market abuse. These directives are in turn providing opportunities for companies such as ours. Currently, there are discussions on legislative initiatives in relation to CCP services and OTC derivatives transactions. As the regulatory environment continues to change and related opportunities arise, we intend to use our position in the industry to continue product development, and ensure that NASDAQ OMX Europe and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic maintain favorable liquidity and offer efficient trading.

 

Confidence in capital markets is paramount for trading to function properly. NASDAQ OMX Nordic carries out market regulation through an independent unit that is separate from the business operations. The surveillance work is organized into two functions: one for the listing of instruments and surveillance of companies (issuer surveillance) and one for surveillance of trading (trading surveillance). The real-time trading surveillance for the Finnish, Icelandic, Danish and Swedish markets has been centralized to Stockholm. Subject to regulatory approvals, our intent is to move the real-time trading surveillance for NASDAQ OMX Europe to Stockholm during 2010. In Iceland, the surveillance activities are carried out by specially appointed persons. In addition, there are special personnel who carry out surveillance activities at each of the three Baltic Exchanges. There are three surveillance committees at NASDAQ OMX Nordic, one at each NASDAQ OMX Nordic Exchange in Sweden, Finland and Denmark. These committees have an advisory role in relation to surveillance matters. In Sweden and Finland, decisions to list new companies are made by the listing committees of the exchanges. In Denmark and Iceland, listing decisions are made by the President of the exchange, a duty delegated by the board of NASDAQ OMX Nordic Copenhagen and NASDAQ OMX Iceland, respectively.

 

If there is suspicion that a listed company or member has acted in breach of exchange regulations, the matter is dealt with by the market regulation division. Serious breaches are considered by the respective disciplinary committee in Sweden and Finland. In Denmark, all matters are dealt with by the surveillance department. In Iceland, enforcement committees handle all breaches of exchange regulations, while disciplinary committees handle the determination of fines. Suspected insider trading is reported to the appropriate authorities in the respective country or countries.

 

The entities that operate trading venues in the Nordic and Baltic countries are each subject to local regulation. In Sweden, general supervision of the exchange market operated by NASDAQ OMX Stockholm is carried out by the SFSA, while NASDAQ OMX Stockholm’s role as central counterparty in the clearing of derivatives is overseen by the SFSA and the Swedish central bank, Riksbanken. Additionally, as a function of the Swedish two-tier supervisory model, certain surveillance in relation to the exchange market is carried out by us, acting through our surveillance division.

 

NASDAQ OMX Stockholm’s exchange and clearing activities are regulated primarily by the Swedish Securities Markets Act 2007:528, or SSMA, which sets up basic requirements regarding the board of the exchange or clearinghouse and its share capital, and which also outlines the conditions on which exchange and clearing licenses are issued. The SSMA also provides that any changes to the exchange’s articles of association following initial registration must be approved by the SFSA.

 

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With respect to ongoing operations, the SSMA requires exchanges to conduct their activities in an “honest, fair and professional manner, and in such a way as to maintain public confidence in the securities markets.” When operating a regulated market, an exchange must apply the principles of free access (i.e., that each person which meets the requirements established by law and by the exchange may participate in trading), neutrality (i.e., that the exchange’s rules for the regulated market are applied in a consistent manner to all those who participate in trading) and transparency (i.e., that the participants must be given speedy, simultaneous and correct information concerning trading and that the general public must be given the opportunity to access this information). Additionally, the exchange operator must identify and manage the risks which may arise in its operations, use secure technical systems and identify and handle the conflicts of interest which may arise between the exchange or its owners’ interests and the interest in safeguarding effective risk management and secure technical systems. Similar requirements are set up by the SSMA in relation to clearing operations.

 

The SSMA also contains the framework for both the SFSA’s supervisory work in relation to exchanges and clearinghouses and the surveillance to be carried out by the exchanges themselves. The latter includes the requirement that an exchange should have “an independent surveillance function with sufficient resources and powers to meet the exchange’s obligations.” That requires the exchange to, among other things, supervise trading and price information, compliance with laws, regulations and good market practice, participant compliance with trading participation rules, financial instrument compliance with relevant listing rules and the extent to which issuers meet their obligation to submit regular financial information to relevant authorities.

 

The regulatory environment in the other Nordic and Baltic countries in which a NASDAQ OMX entity has a trading venue is broadly similar to the regulatory environment in Sweden. Since 2005, there has been a Memorandum of Understanding between the SFSA and the main supervisory authorities in Denmark and Finland, which looks to safeguard effective and comprehensive supervision of the exchanges comprising NASDAQ OMX Nordic and the systems operated by it, and to ensure a common supervisory approach.

 

Employees

 

As of December 31, 2009, NASDAQ OMX had 2,216 employees, of which 978 were based in the U.S. and 1,238 were based outside of the U.S. None of our U.S. employees is subject to collective bargaining agreements or is represented by a union. Approximately 109 employees based in Denmark and Finland are covered by local union agreements.

 

In addition, at December 31, 2009, IDCG had 19 employees who are included in headcount numbers for financial statement reporting purposes since they are staff employed at a consolidated entity where we have a controlling financial interest.

 

NASDAQ OMX Website and Availability of SEC Filings

 

We file periodic reports, proxy statements and other information with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (such as us). The address of that site is http://www.sec.gov.

 

Our website is www.nasdaqomx.com. Information on our website is not a part of this Form 10-K. We will make available free of charge on our website, or provide a link to, our Forms 10-K, Forms 10-Q and Forms 8-K and any amendments to these documents, that are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. To access these filings, go to NASDAQ OMX’s website and click on “Investor Relations,” then click on “Financial Information,” then click on “SEC Filings.”

 

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We intend to use our website, www.nasdaqomx.com, as a means of disclosing material non-public information and for complying with disclosure obligations under SEC Regulation FD. These disclosures will be included on our website under “Investor Relations—Events and Presentations.”

 

Item 1A. Risk Factors.

 

The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks actually occur, our business, financial condition, or operating results could be adversely affected.

 

Risks Relating to our Business

 

Our industry is highly competitive.

 

We face intense competition from other exchanges and markets for market share of trading activity and listings. In addition, our market data, global index and market technology businesses face significant competition from other market participants. This competition includes both product and price competition and has continued to increase as a result of the creation of new execution and listing venues in the United States and Europe. Increased competition may result in a decline in our share of trading activity, listings and the markets for the products we offer, thereby adversely affecting our operating results.

 

The liberalization and globalization of world markets has resulted in greater mobility of capital, greater international participation in local markets and more competition. As a result, both in the U.S. and in other countries, the competition among exchanges and other execution venues has become more intense. In the last several years, many marketplaces in both Europe and the United States have demutualized to provide greater flexibility for future growth. The securities industry also has experienced consolidation, creating a more intense competitive environment. Regulatory changes, such as MiFID, also have facilitated the entry of new participants in the EU that compete with our European exchanges and MTF. The regulatory environment, both in the U.S. and in Europe, is structured to maintain this environment of intense competition. In addition, a high proportion of business in the securities markets is becoming increasingly concentrated in a smaller number of institutions and our revenue may therefore become concentrated from a smaller number of customers.

 

We also compete globally with other regulated exchanges and markets, ATSs, MTFs and other traditional and non-traditional execution venues. Some of these competitors also are our customers. Our exchange competitors include NYSE Euronext, the London Stock Exchange, Deutsche Borse, the Tokyo Stock Exchange, and a number of other exchanges in the U.S. and around the world. Exchanges offer a range of services comparable to those offered by our exchanges and generally compete with us in providing trade executions, trade reporting, market data, listings, regulation, and index services. Public ATSs in the U.S. and MTFs in Europe are broker-dealer operated systems that offer trade execution services, typically at very low cost. Our competitors include Direct Edge ATS in the U.S. and Burgundy MTF in the Nordics. In London, Chi-X, Turquoise and BATS MTFs offer pan-European execution services in competition with both our Nordic exchanges and NASDAQ OMX Europe. Other competing execution venues include broker-dealer owned systems such as dark-pools and internalization engines which may or may not be registered as ATSs or MTFs. Like ATSs and MTFs, these venues also compete with us by offering low cost executions and differ from public ATSs and MTFs in the degree of transparency they offer and in restrictions on who may access these systems.

 

Competitors may develop market trading platforms that are more competitive than ours. If we are unable to compete successfully in this environment, our business, financial condition and operating results will be adversely affected.

 

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Price competition has affected and could continue to affect our business.

 

The securities trading industry is characterized by intense price competition. We have in the past lowered prices, and in the U.S., increased market data rebates for trade executions to attempt to gain or maintain market share. These strategies have not always been successful and have at times hurt operating performance. Additionally, we have also been, and may once again be, required to adjust pricing to respond to actions by competitors, which could adversely impact operating results. We are also subject to potential price competition from new competitors and from new and existing regulated markets and MTFs. We also compete with respect to the pricing of market data and with respect to products for pre-trade book data and for post-trade last sale data. In the future, our competitors may offer market data rebates for quotes and trades on their systems. If we are unable to compete successfully in respect to the pricing of our services and products, our business, financial condition and operating results may be adversely affected.

 

A decline in trading volume will decrease our trading revenues.

 

Trading volume is directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of securities and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated significantly depending on market conditions and other factors beyond our control. As market volatility declined in 2009 so did trading volumes relative to previous levels. Current initiatives being considered by regulators and governments, such as restrictions on high frequency trading and taxes on securities transactions, could have a material adverse effect on overall trading volumes. Because a significant percentage of our revenues is tied directly to the volume of securities traded on our markets, it is likely that a general decline in trading volumes would lower revenues and may adversely affect our operating results if we are unable to offset falling volumes through our pricing. Declines in trading volumes may also impact our market share or pricing structures and adversely affect our business and financial condition.

 

Our market share of trading has declined and may continue to decline.

 

Our matched market share in NASDAQ-listed securities executed on NASDAQ declined from 46.1% in 2007 to 33% in 2009 and our combined matched market share in all U.S.-listed securities declined from 29.1% in 2007 to 23% in 2009. In addition, as a result of the adoption of MiFID, a number of MTFs have launched, thereby significantly increasing competition in Europe. As a result, our matched market share in securities listed on our exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic has declined from 100% in 2007 to 88% in 2009.

 

Although there have been improvements in our matched market share in the U.S. in recent months, if our total market share in these securities continues to decrease relative to our competitors, our venues may be viewed as less attractive sources of liquidity. If growth in overall trading volume of these securities does not offset continued declines in our market share, or if our exchanges are perceived to be less liquid, then our business, financial condition and operating results could be adversely affected.

 

Declines in market share could result in issuers viewing the value of a listing on our exchanges as less attractive, thereby adversely affecting our listing business. Also, declines in market share of NASDAQ-listed securities could lower NASDAQ’s share of tape pool revenues under the UTP plan, thereby reducing the revenues of our market data business.

 

Economic conditions and market factors, which are beyond our control, may adversely affect our business and financial condition.

 

Our business performance is impacted by a number of factors including general economic conditions and other factors that are generally beyond our control. Although access to credit markets has improved recently, a long-term continuation of challenging economic conditions is likely to negatively impact our business. Adverse

 

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market conditions could reduce customer demand for our services and the ability of our customers, lenders and other counterparties to meet their obligations to us. Poor economic conditions may result in a decline in trading volume, deterioration of the economic welfare of our listed companies and a reduction in the demand for our products, including our market data, indexes and market technology. Trading volume is driven primarily by general market conditions and declines in trading volume may affect our market share and impact our pricing.

 

The number of listings on our markets is primarily influenced by factors such as investor demand, the global economy, available sources of financing, and tax and regulatory policies. Adverse conditions may jeopardize the ability of our listed companies to comply with the continued listing requirements of our exchanges.

 

Market data revenues also may be significantly affected by global economic conditions. Professional subscriptions to our market data are at risk if staff reductions continue to occur in financial services companies, which could result in significant reductions in our market data professional user revenue. In addition, adverse market conditions may cause reductions in the number of non-professional investors with investments in the market.

 

A reduction in trading volumes, market share of trading, the number of our listed companies and a decline in market data revenue due to economic conditions or other market factors could adversely affect our business, financial condition and operating results.

 

Declines in the initial public offering market could have an adverse effect on our revenues.

 

In 2009, the pace of initial public offerings recovered modestly from the record-low level of 2008 in the U.S., but remained severely depressed in the Nordics. Although we have experienced positive trends in the number of IPO applications in the fourth quarter of 2009 and in the beginning of 2010, the outlook for recovery in the market for initial public offerings is closely tied to the availability of risk capital which may not return to historic levels for some time. Stagnation or decline in the initial public offering market will impact the number of new listings on The NASDAQ Stock Market and the exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic, and thus our related revenues. We recognize revenue from new listings on The NASDAQ Stock Market on a straight-line basis over an estimated six-year service period. As a result, a stagnant market for initial public offerings could cause a decrease in deferred revenues for future years. Furthermore, as initial public offerings are typically actively traded following their offering date, a prolonged decrease in the number of initial public offerings could negatively impact the growth of our transactions revenues.

 

Regulatory changes and changes in market structure, especially in response to adverse financial conditions, could have a material adverse effect on our business.

 

In recent years, the securities trading industry and, in particular, the securities markets have been subject to significant regulatory changes. Moreover, in the past two years, the securities markets have been the subject of increasing governmental and public scrutiny in response to the global economic crisis.

 

During the coming year, it is likely that there will be significant changes in the regulatory environment in which we operate our businesses, although we cannot predict the nature of these changes or their impact on our business at this time. For example, the SEC published a concept release early in 2010 that could result in significant changes in the competitive landscape. In addition, actions on any of the specific regulatory issues currently under review in the U.S. and Europe such as short selling, co-location, high-frequency trading, derivatives clearing, market transparency, taxes on stock transactions, restrictions on proprietary trading by certain of our customers and other related proposals could have a material impact on our business.

 

Our market participants also operate in a highly regulated industry. The SEC, the SFSA and other regulatory authorities could impose regulatory changes that could adversely impact the ability of our market participants to use our markets. Regulatory changes by the SEC, the SFSA or other regulatory authorities could result in the loss of a significant number of market participants or a reduction in trading activity on our markets.

 

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We will need to invest in our operations to maintain and grow our business and to integrate acquisitions, and we may need additional funds, which may not be readily available.

 

We depend on the availability of adequate capital to maintain and develop our business. Although we believe that we can meet our current capital requirements from internally generated funds, cash on hand and available borrowings under our existing credit facility, if the capital and credit markets experience volatility, access to capital or credit may not be available on terms acceptable to us or at all. Although we successfully refinanced our existing credit facilities earlier this year by issuing senior unsecured notes and entering into a new unsecured credit facility, limited access to capital or credit in the future could have an impact on our ability to refinance debt, maintain our credit rating, meet our regulatory capital requirements, engage in strategic initiatives, make acquisitions or strategic investments in other companies or react to changing economic and business conditions. If we are unable to fund our capital or credit requirements, it could have an adverse effect on our business, financial condition and operating results.

 

In addition to our debt obligations, we will need to continue to invest in our operations for the foreseeable future to integrate acquired businesses and to fund new initiatives. If we do not achieve the expected operating results, we will need to reallocate our cash resources. This may include borrowing additional funds to service debt payments, which may impair our ability to make investments in our business or to integrate acquired businesses.

 

Should we need to raise funds through issuing additional equity, our equity holders will suffer dilution. Should we need to raise funds through incurring additional debt, we may become subject to covenants even more restrictive than those contained in our existing credit facility, the indentures governing our notes and our other debt instruments. Furthermore, if adverse economic conditions persist or worsen, we could experience decreased revenues from our operations which could affect our ability to satisfy financial and other restrictive covenants to which we are subject under our existing indebtedness.

 

Any reduction in our credit rating could increase the cost of our funding from the capital markets.

 

Our long-term debt is currently rated investment grade by two of the major rating agencies. These rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. There can be no assurance that we will maintain our current ratings. Our failure to maintain those ratings could adversely affect the cost and other terms upon which we are able to obtain funding and increase our cost of capital. A reduction in credit ratings would also result in increases in the cost of our outstanding debt as the interest rate on the outstanding amounts under our credit facility fluctuates based on our credit ratings.

 

We may not be able to keep up with rapid technological and other competitive changes affecting our industry.

 

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing products and services, the adoption of new services and products and changing customer demands. If our platforms fail to function as expected, our business would be negatively affected. In addition, our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce or market new services and products or if we need to adopt costly and customized technology for our services and products. Further, our failure to anticipate or respond adequately to changes in technology and customer preferences, especially in our market technology business, or any significant delays in product development efforts, could have a material adverse effect on our business, financial condition and operating results.

 

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System limitations, failures or security breaches could harm our business.

 

Our businesses depend on the integrity and performance of the computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in trade outages, lower trading volumes, financial losses, decreased customer service and satisfaction and regulatory sanctions. Our markets have experienced occasional systems failures and delays in the past and could experience future systems failures and delays.

 

If trading volumes increase unexpectedly, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

 

Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage or terrorism, computer viruses, intentional acts of vandalism and similar events. We have programs in place to identify and minimize our exposure to these vulnerabilities and work in collaboration with the technology industry to share corrective measures with our business partners. Although we currently maintain and expect to maintain multiple computer facilities that are designed to provide redundancy and back-up to reduce the risk of system disruptions and have facilities in place that are expected to maintain service during a system disruption, such systems and facilities may prove inadequate. Any system failure that causes an interruption in service or decreases the responsiveness of our services could impair our reputation, damage our brand name and negatively impact our business, financial condition and operating results.

 

We may not be able to successfully integrate acquired businesses, which may result in an inability to realize the anticipated benefits of our acquisitions.

 

We must rationalize, coordinate and integrate the operations of acquired businesses. This process involves complex technological, operational and personnel-related challenges, which are time-consuming and expensive and may disrupt our business. The difficulties, costs and delays that could be encountered may include:

 

   

unforeseen difficulties, costs or complications in combining the companies’ operations, which could lead to us not achieving the synergies we anticipate;

 

   

unanticipated incompatibility of systems and operating methods;

 

   

inability to use capital assets efficiently to develop the business of the combined company;

 

   

the difficulty of complying with government-imposed regulations in the U.S. and abroad, which may be conflicting;

 

   

resolving possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures;

 

   

the diversion of management’s attention from ongoing business concerns and other strategic opportunities;

 

   

the integration of businesses, operations and workforces;

 

   

unforeseen difficulties in operating acquired businesses in parallel with similar businesses that we operated previously;

 

   

unforeseen difficulties in operating businesses we have not operated before;

 

   

unanticipated difficulty of integrating multiple acquired businesses simultaneously;

 

   

the retention of key employees and management;

 

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the implementation of disclosure controls, internal controls and financial reporting systems at non-U.S. subsidiaries to enable us to comply with U.S. generally accepted accounting principles, or U.S. GAAP, and U.S. securities laws and regulations, including the Sarbanes Oxley Act of 2002, required as a result of our status as a reporting company under the Exchange Act;

 

   

the coordination of geographically separate organizations;

 

   

the coordination and consolidation of ongoing and future research and development efforts;

 

   

possible tax costs or inefficiencies associated with integrating the operations of a combined company;

 

   

pre-tax restructuring and revenue investment costs;

 

   

the retention of strategic partners and attracting new strategic partners; and

 

   

negative impacts on employee morale and performance as a result of job changes and reassignments.

 

For these reasons, we may not achieve the anticipated financial and strategic benefits from our acquisitions. Any actual cost savings and synergies may be lower than we expect and may take a longer time to achieve than we anticipate, and we may fail to realize the anticipated benefits of acquisitions.

 

We may experience fluctuations in our operating results, which may adversely affect the market price of our common stock.

 

The financial services industry is risky and unpredictable and is directly affected by many national and international factors beyond our control, including:

 

   

economic, political and geopolitical market conditions;

 

   

natural disasters, terrorism, war or other catastrophes;

 

   

broad trends in industry and finance;

 

   

changes in price levels and volatility in the stock markets;

 

   

the level and volatility of interest rates;

 

   

changes in government monetary or tax policy;

 

   

other legislative and regulatory changes;

 

   

the perceived attractiveness of the U.S. or European capital markets; and

 

   

inflation.

 

Any one of these factors could have a material adverse effect on our business, financial condition and operating results by causing a substantial decline in the financial services markets and reducing trading volumes.

 

Additionally, since borrowings under our credit facilities bear interest at variable rates, any increase in interest rates on debt that we have not fixed using interest rate hedges will increase our interest expense and reduce our cash flow. Other than variable rate debt, we believe our business has relatively large fixed costs and low variable costs, which magnifies the impact of revenue fluctuations on our operating results. As a result, a decline in our revenue may lead to a relatively larger impact on operating results. A substantial portion of our operating expenses will be related to personnel costs, regulation and corporate overhead, none of which can be adjusted quickly and some of which cannot be adjusted at all. Our operating expense levels will be based on our expectations for future revenue. If actual revenue is below management’s expectations, or if our expenses increase before revenues do, both revenues less liquidity rebates, brokerage, clearance and exchange fees and operating results would be materially and adversely affected. Because of these factors, it is possible that our

 

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operating results or other operating metrics may fail to meet the expectations of stock market analysts and investors. If this happens, the market price of our common stock may be adversely affected.

 

We are exposed to counterparty risk for all transactions that are cleared through our markets.

 

We clear a range of equity-related and fixed-income-related derivative products. We assume the counterparty risk for all transactions that are cleared through our markets and guarantee that our cleared contracts will be honored. We enforce minimum financial and operational criteria for membership eligibility, require members and investors to provide collateral, and maintain established risk policies and procedures to ensure that the counterparty risks are properly monitored and pro-actively managed; however, none of these measures provides absolute assurance against defaults by our counterparties on their obligations. No guarantee can be given that the collateral provided will at all times be sufficient. Although we maintain clearing capital resources to serve as an additional layer of protection to help ensure that we are able to meet our obligations, these resources may not be sufficient. In addition, our high leverage could limit our flexibility in the operation of our clearing business.

 

Our leverage limits our financial flexibility, increases our exposure to weakening economic conditions and may adversely affect our ability to obtain additional financing.

 

In connection with recent acquisitions, we incurred a significant amount of indebtedness that we refinanced in January 2010. Our indebtedness as of December 31, 2009 was approximately $2.1 billion. We also may borrow up to an additional $250.0 million under a revolver that is part of our new credit facilities.

 

Our leverage could:

 

   

reduce funds available to us for operations and general corporate purposes or for capital expenditures as a result of the dedication of a substantial portion of our consolidated cash flow from operations to the payment of principal and interest on our indebtedness;

 

   

increase our exposure to a continued downturn in general economic conditions;

 

   

place us at a competitive disadvantage compared with our competitors with less debt; and

 

   

affect our ability to obtain additional financing in the future for refinancing indebtedness, acquisitions, working capital, capital expenditures or other purposes.

 

In addition, we must comply with the covenants in our credit facilities. Among other things, these covenants restrict our ability to grant liens, incur additional indebtedness, pay dividends and conduct transactions with affiliates. Failure to meet any of the covenant terms of our credit facilities could result in an event of default. If an event of default occurs, and we are unable to receive a waiver of default, our lenders may increase our borrowing costs, restrict our ability to obtain additional borrowings and accelerate all amounts outstanding.

 

We may incur goodwill, intangible asset or other long-lived asset impairment charges in the future.

 

Our business acquisitions typically result in the recording of goodwill and intangible assets, and the recorded values of those assets may become impaired in the future. As of December 31, 2009, goodwill totaled approximately $4.8 billion and intangible assets, net of accumulated amortization, totaled approximately $1.6 billion. The determination of the value of such goodwill and intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. Goodwill for our three reporting units are reviewed for impairment annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1 st carrying values. We assess potential impairments to goodwill and intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Considerable management judgment is necessary to evaluate the impact of operating and

 

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macroeconomic changes and to estimate cash flow. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill and intangible assets are based on operational performance of our acquired businesses, market conditions, relevant trading multiples of comparable companies, the trading price of our common stock and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. However, disruptions to our business, such as continued economic weakness and unexpected significant declines in operating results of reporting units, may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill or intangible asset impairment charges in the future. For goodwill, if the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value. For intangible assets, impairment exists if the carrying value of the intangible asset exceeds its fair value.

 

We also assess potential impairments to our other long-lived assets, including equity method investments, property and equipment and other assets, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.

 

If we incur goodwill, intangible asset or other long-lived asset impairment charges in the future our operating results could be adversely affected.

 

Our investment in NASDAQ Dubai may result in an additional impairment charge and could harm us in other ways.

 

In exchange for $50 million in cash and the entry into certain licensing and technology agreements, we acquired 33  1 / 3 % of the outstanding equity of NASDAQ Dubai in 2008. At that time, NASDAQ OMX valued its total NASDAQ Dubai investment at $128 million. In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. As part of this realignment, NASDAQ Dubai will become a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We will receive a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai will remain unchanged. The realignment is expected to be completed during the first half of 2010 and, at that time, we may record a gain or a loss based on the then-current market price of DFM shares and the then-current carrying value of our investment in NASDAQ Dubai.

 

Additionally, the licensing and technology agreements we have entered into with NASDAQ Dubai may have an adverse effect on us to the extent that our brand is not promoted in a manner that benefits our shareholders. We may not be able to terminate these agreements or end our association with NASDAQ Dubai in a manner that would prevent harm to our brand and reputation, particularly in certain key emerging markets. Our agreements with NASDAQ Dubai also prevent or limit us from seeking opportunities to grow our business in certain regions, and this may have a negative impact on our ability to enter those markets in the future.

 

The regulatory framework under which we operate and new regulatory requirements or new interpretations of existing regulatory requirements could require substantial time and resources for compliance, which could make it difficult and costly for us to operate our business.

 

Our business is subject to extensive regulation. Under current U.S. federal securities laws, changes in the rules and operations of our markets, including our pricing structure, must be reviewed and in many cases

 

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explicitly approved by the SEC. The SEC may approve, disapprove, or recommend changes to proposals that we submit. In addition, the SEC may delay either the approval process or the initiation of the public comment process. Any delay in approving changes, or the altering of any proposed change, could have an adverse effect on our business, financial condition and operating results. We must compete not only with ATSs that are not subject to the same SEC approval process but also with other exchanges that may have lower regulation and surveillance costs than us. There is a risk that trading will shift to exchanges that charge lower fees because, among other reasons, they spend significantly less on regulation.

 

Furthermore, certain of our other businesses, including NFX, the clearinghouse operated by IDCG and Agora-X, are subject to regulation by the CFTC. In addition, our registered broker-dealer subsidiaries, Nasdaq Execution Services, LLC and NASDAQ Option Services, LLC, are subject to regulation by the SEC, FINRA and other self-regulatory organizations. These subsidiaries are subject to regulatory requirements intended to ensure their general financial soundness and liquidity, which require that they comply with certain minimum capital requirements. The SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria, dictate the ratio of debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the Uniform Net Capital Rule and NYSE and FINRA rules impose certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC, the NYSE and FINRA for certain withdrawals of capital. Any failure to comply with these broker-dealer regulations could have a material adverse effect on the operation of our business, financial condition and operating results.

 

Our non-U.S. business is subject to regulatory oversight in all the countries in which we operate regulated businesses, such as operating exchanges or CSDs. The countries in which we currently operate or share ownership in regulated businesses include Sweden, Finland, Denmark, Iceland, Estonia, Lithuania, Latvia, Norway, Armenia, Switzerland, the Netherlands and the United Kingdom. In all the aforementioned countries, we have received authorization from the relevant authorities to conduct our regulated business activities. The authorities may revoke this authorization if we do not suitably carry out our regulated business activities. The authorities are also entitled to request that we adopt measures in order to ensure that we continue to fulfill the authorities’ requirements.

 

Furthermore, we hold minority stakes in other regulated entities, and certain of our customers operate in a highly regulated industry. Regulatory authorities with jurisdiction over our non-U.S. entities could impose regulatory changes that could impact the ability of our customers to use our European exchanges or NASDAQ OMX Europe. The loss of a significant number of customers or a reduction in trading activity on any of our European exchanges or NASDAQ OMX Europe as a result of such changes could have a material adverse effect on our business, financial condition and operating results.

 

We have self-regulatory obligations and also operate for-profit businesses, and these two roles may create conflicts of interest.

 

We have obligations to regulate and monitor activities on our markets and ensure compliance with applicable law and the rules of our markets by market participants and listed companies. In the U.S., the SEC staff has expressed concern about potential conflicts of interest of “for-profit” markets performing the regulatory functions of a self-regulatory organization. Although our U.S. cash equities and options exchanges outsource the majority of their market regulation functions to FINRA, we do perform regulatory functions related to our listed companies and our markets. Any failure by us to diligently and fairly regulate our markets or to otherwise fulfill our regulatory obligations could significantly harm our reputation, prompt SEC scrutiny and adversely affect our business and reputation.

 

Our Nordic and Baltic exchanges also monitor trading and compliance with listing standards. They monitor the listing of equities and other financial instruments. The prime objective of such monitoring activities is to promote confidence in the exchanges among the general public and to ensure fair and orderly functioning

 

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markets. The monitoring functions within the exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic are the responsibility of the surveillance departments or other surveillance personnel. The surveillance departments or personnel are intended to strengthen the integrity of and confidence in these exchanges and to avoid conflicts of interest. Any failure to diligently and fairly regulate the Nordic and Baltic exchanges could significantly harm our reputation, prompt scrutiny from regulators and adversely affect our business and reputation.

 

We are exposed to credit risk from third parties, including customers, counterparties and clearing agents.

 

We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons.

 

Our subsidiaries Nasdaq Execution Services and NASDAQ Options Services may be exposed to credit risk, due to the default of trading counterparties, in connection with the clearing and routing services they provide for our trading customers. System trades in equities routed to other market centers for members of The NASDAQ Stock Market are cleared by Nasdaq Execution Services, as a member of the National Securities Clearing Corporation, or NSCC. System trades in derivative contracts for the opening and closing cross and trades routed to other market centers are cleared by NASDAQ Options Services, as a member of the OCC. Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services also is liable for any losses incurred due to counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Pursuant to the rules of the OCC and NASDAQ Options Services’ clearing agreement, NASDAQ Options Services also is liable for any losses incurred due to counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities and derivative contracts that are subject to these transactions can increase our credit risk. Credit difficulties or insolvency or the perceived possibility of credit difficulties or insolvency of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions.

 

In addition, through our NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG clearing operations, we act as a counterparty in each transaction and thereby guarantee the fulfillment of each contract. We also are required to pledge collateral for commitments with other clearinghouses.

 

We also have credit risk related to transaction fees that are billed to customers on a monthly basis, in arrears. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets.

 

Credit losses such as those described above could adversely affect our consolidated financial position and results of operations.

 

We are subject to risks relating to litigation, potential securities law liability and other liability.

 

Many aspects of our business potentially involve substantial liability risks. Although we are immune from private suits for self-regulatory organization activities, this immunity only covers certain of our activities in the U.S., and we could be exposed to liability under national and local laws, court decisions and rules and regulations promulgated by regulatory agencies.

 

In the U.S., we are subject to oversight by the SEC, and our subsidiaries NFX, IDCG and Agora-X are subject to oversight by the CFTC. In the case of non-compliance with our obligations under either the securities or commodities laws, we could be subject to investigation and judicial or administrative proceedings that may result in substantial penalties.

 

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Our non-U.S. business is regulated both at the national level in several countries and at the European Union level. Implementation and application of these regulations may be undertaken by one or more regulatory authorities, which may challenge compliance with one or more aspects of such regulations. If a regulatory authority makes a finding of non-compliance, conditional fines can be imposed and our licenses can be revoked.

 

Some of our other liability risks arise under the laws and regulations relating to the insurance, tax, anti-money laundering, technology export, foreign asset controls and foreign corrupt practices areas. Liability could also result from disputes over the terms of a trade, claims that a system failure or delay cost a customer money, claims we entered into an unauthorized transaction or claims that we provided materially false or misleading statements in connection with a securities transaction. As we intend to defend any such litigation actively, significant legal expenses could be incurred.

 

Failure to attract and retain key personnel may adversely affect our ability to conduct our business.

 

Our future success depends, in large part, upon our ability to attract and retain highly qualified professional personnel. Competition for key personnel in the various localities and business segments in which we operate is intense. Our ability to attract and retain key personnel, in particular senior officers, will be dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. There is no guarantee that we will have the continued service of key employees who we rely upon to execute our business strategy and identify and pursue strategic opportunities and initiatives. In particular, we may have to incur costs to replace senior executive officers or other key employees who leave, and our ability to execute our business strategy could be impaired if we are unable to replace such persons in a timely manner.

 

We are highly dependent on the continued services of Robert Greifeld, our Chief Executive Officer, and other executive officers and key employees who possess extensive financial markets knowledge and technology skills. We do not have employment agreements with some of these key executive officers. We do not maintain “key person” life insurance policies on any of our executive officers, managers, key employees or technical personnel. The loss of the services of these persons for any reason, as well as any negative market or industry perception arising from those losses, could have a material adverse effect on our business, financial condition and operating results.

 

Failure to protect our intellectual property rights could harm our brand-building efforts and ability to compete effectively.

 

To protect our intellectual property rights, we rely on a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with our affiliates, clients, strategic partners and others. The protective steps that we take may be inadequate to deter misappropriation of our proprietary information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.

 

We have registered, or applied to register, our trademarks in the United States and in over 50 foreign jurisdictions and have pending U.S. and foreign applications for other trademarks. We also maintain copyright protection on our branded materials and pursue patent protection for software products, inventions and other processes developed by us. We also hold a number of patents, patent applications and licenses.

 

Effective trademark, copyright, patent and trade secret protection may not be available in every country in which we offer our services. Failure to protect our intellectual property adequately could harm our brand and affect our ability to compete effectively. Further, defending our intellectual property rights could result in the expenditure of significant financial and managerial resources.

 

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Damage to our reputation could have a material adverse effect on our businesses.

 

One of our competitive strengths is our strong reputation and brand name. Various issues may give rise to reputational risk, including issues relating to:

 

   

the representation of our business in the media;

 

   

the accuracy of our financial statements and other financial and statistical information;

 

   

the accuracy of our financial guidance or other information provided to our investors;

 

   

the quality of our corporate governance structure;

 

   

the quality of our products, including the reliability of our transaction-based business, the accuracy of the quote and trade information provided by our market data business and the accuracy of calculations used by our Global Index Group for indexes and unit investment trusts;

 

   

the ability to execute our business plan, key initiatives or new business ventures and the ability to keep up with changing customer demand;

 

   

the quality of our disclosure controls or internal controls over financial reporting, including any failures in supervision;

 

   

any negative publicity surrounding our listed companies;

 

   

security breaches, including any unauthorized delivery of proprietary data to third parties or physical security breaches;

 

   

management of our outsourcing partnerships, especially our relationship with FINRA; and

 

   

any misconduct or fraudulent activity by our employees or other persons formerly or currently associated with us.

 

Damage to our reputation could cause some issuers not to list their securities on our exchanges, as well as reduce the trading volume on our exchanges or cause us to lose customers in our market data, index or market technology businesses. This, in turn, may have a material adverse effect on our business, financial condition and operating results.

 

We are a holding company that depends on cash flow from our subsidiaries to meet our obligations, and any restrictions on our subsidiaries’ ability to pay dividends or make other payments to us may have a material adverse effect on our results of operations and financial condition.

 

We are a holding company with no direct operating businesses other than the equity interests of our subsidiaries. We require dividends and other payments from our subsidiaries to meet cash requirements or to pay dividends. Minimum capital requirements mandated by regulatory authorities having jurisdiction over some of our regulated subsidiaries indirectly restrict the amount of dividends paid upstream. If our subsidiaries are unable to pay dividends and make other payments to us when needed, we may be unable to satisfy our obligations, which would have a material adverse effect on our business, financial condition and operating results.

 

Future acquisitions, partnerships and joint ventures may require significant resources and/or result in significant unanticipated losses, costs or liabilities.

 

Over the past year, acquisitions have been significant factors in our growth. Although we cannot predict our rate of growth as the result of acquisitions with complete accuracy, we believe that additional acquisitions or entering into partnership and joint ventures will be important to our growth strategy. Many of the other potential purchasers of assets in our industry have greater financial resources than we have. Therefore, we cannot be sure that we will be able to complete future acquisitions on terms favorable to us.

 

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We may finance future acquisitions by issuing additional equity and/or debt. The issuance of additional equity in connection with any such transaction could be substantially dilutive to existing shareholders. The issuance of additional debt could increase our leverage substantially. In addition, announcement or implementation of future transactions by us or others could have a material effect on the price of our common stock. We could face financial risks associated with incurring additional debt, particularly if the debt results in significant incremental leverage. Additional debt may reduce our liquidity, curtail our access to financing markets, impact our standing with credit agencies and increase the cash flow required for debt service. Any incremental debt incurred to finance an acquisition could also place significant constraints on the operation of our business.

 

These equity, debt and managerial commitments may impair the operation of our businesses. Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including:

 

   

problems with effective integration of operations;

 

   

the inability to maintain key pre-acquisition business relationships;

 

   

increased operating costs;

 

   

the diversion of our management team from its other operations;

 

   

problems with regulatory bodies;

 

   

exposure to unanticipated liabilities;

 

   

difficulties in realizing projected efficiencies, synergies and cost savings; and

 

   

changes in our credit rating and financing costs.

 

Our non-U.S. business operates in various emerging markets that are subject to greater political, economic and social uncertainties than developed countries.

 

The operations of our non-U.S. business are subject to the risk inherent in international operations, including but not limited to, risks with respect to operating in Iceland, the Baltics, Central and Eastern Europe, the Middle East and Asia. Some of these economies may be subject to greater political, economic and social uncertainties than countries with more developed institutional structures. Political, economic or social events or developments in one or more of these countries could adversely affect our operations and financial results.

 

We have invested substantial capital in system platforms, and a failure to successfully implement such systems could adversely affect our business.

 

In our technology operations, we have invested substantial amounts in the development of system platforms and in the rollout of our platforms throughout the company. Although investments are carefully planned, there can be no assurance that the demand for such platforms will justify the related investments and that the future levels of transactions executed on these platforms will be sufficient to generate an acceptable return on such investments. If we fail to generate adequate revenue from planned system platforms, or if we fail to do so within the envisioned timeframe, it could have an adverse effect on our results of operations and financial condition.

 

Because we have operations in several countries, we are exposed to currency risk.

 

We have operations in the U.S., several of the Nordic and Baltic markets, the U.K. and many other foreign countries. We therefore have significant exposure to exchange rate movements between the Swedish Krona, Danish Krone, Icelandic Króna, Norwegian Krone, British Pound Sterling, Euro, U.S. dollar and other foreign currencies. Significant inflation or disproportionate changes in foreign exchange rates with respect to one or more of these currencies could occur as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy or changes in local interest rates. These exchange rate differences will affect the translation of our non-U.S. results of operations and financial condition into U.S. dollars as part of the preparation of our consolidated financial statements.

 

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Charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the market value of our common stock.

 

In accordance with U.S. GAAP, we are accounting for the completion of our acquisitions using the purchase method of accounting. We are allocating the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangibles, and based on their fair values as of the date of completion of the acquisitions, recording the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, or EPS, could be adversely affected by a number of financial adjustments required by U.S. GAAP including the following:

 

   

we will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with acquisitions during such estimated useful lives;

 

   

we may have additional depreciation expense as a result of recording purchased tangible assets at fair value, in accordance with U.S. GAAP, as compared to book value as recorded;

 

   

to the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets; and

 

   

we will incur certain adjustments to reflect the financial condition and operating results under U.S. GAAP and U.S. dollars.

 

Risks Relating to an Investment in Our Common Stock

 

Volatility in our stock price could adversely affect our stockholders.

 

The market price of our common stock is likely to be volatile. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in financial estimates by us or by any securities analysts who might cover our common stock;

 

   

conditions or trends in our industry, including trading volumes, regulatory changes or changes in the securities marketplace;

 

   

conditions or trends in the credit markets;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

 

   

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

   

additions or departures of key personnel; and

 

   

sales of our common stock, including sales of our common stock by our directors and officers, significant stockholders or our strategic investors.

 

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

 

Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. As of December 31, 2009, there were 211,385,464 shares of our common stock outstanding. All of our common stock is freely transferable, except shares held by our “affiliates,” as defined in Rule 144 under the Securities Act.

 

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The number of freely transferable shares of our common stock will increase upon any exercise of outstanding options pursuant to our stock compensation and stock award plan for our employees. There were 6.8 million options exercisable as of December 31, 2009 at a weighted average exercise price of $12.56.

 

It is our intent and policy to settle the principal amounts of the 2.50% convertible notes in cash, which will not impact the number of shares of our common stock. However, we have the option to settle the conversion premium in shares of our common stock or cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of $55.13 per share of common stock.

 

Provisions of our certificate of incorporation, by-laws, approved exchange rules (including provisions included to address SEC concerns) and Delaware law could delay or prevent a change in control of us and entrench current management.

 

Our organizational documents place restrictions on the voting rights of certain stockholders. Our certificate of incorporation limits the voting rights of persons (either alone or with related parties) owning more than 5% of the then outstanding votes entitled to be cast on any matter to 5% of voting power, other than any other person as may be approved by our board of directors prior to the time such person owns more than 5% of the then outstanding votes entitled to be cast on any matter. Any change to the 5% voting limitation would require SEC approval.

 

In response to the SEC’s concern about a concentration of our ownership, the rules of our U.S. exchanges include a rule prohibiting any member or any person associated with a member of the exchange from beneficially owning more than 20% of our outstanding voting interests. SEC consent would be required before any investor could obtain more than a 20% voting interest in us. The rules of our U.S. exchanges also require the SEC’s approval of any business ventures with one of our members, subject to exceptions.

 

Our organizational documents contain provisions that may be deemed to have an anti-takeover effect and may delay, deter or prevent a change of control of us, such as a tender offer or takeover proposal that might result in a premium over the market price for our common stock. Additionally, certain of these provisions make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management.

 

Our certificate of incorporation and by-laws:

 

   

require supermajority stockholder approval to remove directors;

 

   

do not permit stockholders to act by written consent or to call special meetings;

 

   

require certain advance notice for director nominations and actions to be taken at annual meetings;

 

   

require supermajority stockholder approval with respect to certain amendments to our certificate of incorporation and by-laws (including in respect of the provisions set forth above); and

 

   

authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, which could be issued by our board of directors without stockholder approval.

 

Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more (or, in some cases, a holder who previously held 15% or more) of our common stock. In general, Delaware law prohibits a publicly held corporation from engaging in a “business combination” with an “interested stockholder” for three years after the stockholder becomes an interested stockholder, unless the corporation’s board of directors and stockholders approve the business combination in a prescribed manner.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

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Item 2. Properties.

 

The following is a description of our principal properties.

 

Location

 

Use

  Size
(approximate,
in square feet)
 

Type of possession

New York, New York

  Location of MarketSite   26,000   Lease

New York, New York

  U.S. headquarters   115,000   Subleased from FINRA with 17,931 square feet leased back to FINRA

New York, New York

  General office space   53,000   Subleased to third parties

New York, New York

  General office space   48,000   Lease

Philadelphia, Pennsylvania

  Location of NASDAQ OMX PHLX   129,000   Lease

Rockville, Maryland

  General office space   78,000   Lease

Shelton, Connecticut

  General office space   29,000   Lease

Stockholm, Sweden

  European headquarters   409,000   Lease

London, England

  Location of NASDAQ OMX Europe   71,000   Lease

Helsinki, Finland

  General office space   39,000   Lease

Copenhagen, Denmark

  General office space   35,000   Lease

 

We also maintain local headquarters in each of the other European countries where we operate an exchange and office space in countries in which we conduct sales and operations, including Armenia, Australia, Canada, China, Estonia, Hong Kong, Iceland, India, Italy, Japan, Latvia, Lithuania, Norway, Scotland and Singapore.

 

In addition to the above, we currently lease administrative, sales and disaster preparedness facilities in California, Illinois, Massachusetts, Minnesota, New Jersey, Oregon and Washington, DC.

 

Generally, our properties are not earmarked for use by a particular segment; instead, most of our properties are used by two or more segments. We believe the facilities we occupy are adequate for the purposes for which they are currently used and are well-maintained.

 

Item 3. Legal Proceedings.

 

We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits or involved in regulatory proceedings.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

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Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock has been listed on The NASDAQ Stock Market (formerly The Nasdaq National Market) since February 10, 2005, under the ticker symbol “NDAQ.” From July 1, 2002 through February 9, 2005, our common stock traded on the OTCBB under the symbol “NDAQ.”

 

The following chart lists the quarterly high and low sales prices for shares of our common stock for fiscal years 2009 and 2008. These prices are between dealers and do not include retail markups, markdowns or other fees and commissions and may not represent actual transactions.

 

     High    Low

Fiscal 2009

     

Fourth quarter

   $ 21.02    $ 17.63

Third quarter

     23.24      18.71

Second quarter

     22.93      17.51

First quarter

     27.39      18.35

Fiscal 2008

     

Fourth quarter

   $ 34.88    $ 14.96

Third quarter

     38.81      22.76

Second quarter

     42.29      26.47

First quarter

     49.90      34.75

 

As of February 3, 2010, we had approximately 1,006 holders of record of our common stock. As of February 3, 2010, the closing price of our common stock was $19.06. Our credit facilities restrict our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock.

 

Issuer Purchases of Equity Securities

 

Repurchases made in the fiscal quarter ended December 31, 2009 (in whole number of shares):

 

Period

   (a) Total
Number of
Shares (or Units)
Purchased
   (b) Average
Price Paid
per Share
(or Units)
   (c) Total Number of
Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

October 2009

   11,299    $ 18.30        —          —  

November 2009

   14      18.46    —      —  

December 2009

   51,543      19.64    —      —  
                     

Total

   62,856    $ 19.40    —      —  
                     

 

The shares repurchased during the fourth quarter of 2009 were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock grants.

 

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PERFORMANCE GRAPH

 

The following graph compares the total return of our common stock with certain indices and a peer group. These include the NASDAQ Composite Stock Index and the Standard & Poor’s, or S&P, 500 Stock Index as well as the peer group. The peer group includes the CME Group Inc., Deutsche Börse AG, Intercontinental Exchange Inc., LSE, and NYSE Euronext. Information for the indices and the peer group is provided from December 31, 2004 through December 31, 2009. The figures represented below assume an initial investment of $100 in the common stock or index at the closing price on December 31, 2004 and the reinvestment of all dividends.

 

LOGO

 

     12/04    12/05    12/06    12/07    12/08    12/09

The NASDAQ OMX Group, Inc.

   100.00    344.90    301.86    485.20    242.25    194.31

NASDAQ Composite

   100.00    101.33    114.01    123.71    73.11    105.61

S&P 500

   100.00    104.91    121.48    128.16    80.74    102.11

Peer Group

   100.00    159.42    277.66    431.54    143.46    194.17

 

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Item 6. Selected Financial Data.

 

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008 and certain businesses of Nord Pool in October 2008. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 20% aggregate equity interest in Agora-X (13.3% in March 2008 and an additional 6.7% in December 2008). In January 2009, we acquired a 22% equity interest in EMCF and in December 2009, we entered into an agreement to increase our ownership interest in Agora-X to 85% resulting in a majority stake. The financial results of these transactions are included in the consolidated financial results beginning on the date of each acquisition or strategic initiative.

 

The following table sets forth selected financial data on a historical basis for NASDAQ OMX. The following information should be read in conjunction with the consolidated financial statements and notes thereto of NASDAQ OMX included elsewhere in this Form 10-K.

 

Selected Financial Data

 

    Year Ended December 31,  
  2009     2008     2007     2006     2005  
  (in millions, except share and per share amounts)  

Statements of Income Data:

         

Total revenues (1)

  $ 3,409      $ 3,650      $ 2,436      $ 1,658      $ 880   

Cost of revenues (1)

    (1,956     (2,190     (1,624     (971     (354
                                       

Revenues less liquidity rebates, brokerage, clearance and exchange fees

    1,453        1,460        812        687        526   

Total operating expenses

    850        820        447        467        412   

Operating income

    603        640        365        220        114   

Net income attributable to NASDAQ OMX

    266        314        518        128        62   

Net income applicable to common stockholders

    266        314        518        127        55   

Basic and diluted earnings per share:

         

Basic earnings per share

  $ 1.30      $ 1.65      $ 4.47      $ 1.22      $ 0.68   
                                       

Diluted earnings per share

  $ 1.25      $ 1.55      $ 3.46      $ 0.95      $ 0.57   
                                       

Weighted-average common shares outstanding for earnings per share:

         

Basic

    204,698,277        190,362,605        116,064,240        104,311,040        80,543,397   

Diluted

    214,537,907        204,514,862        152,528,691        144,228,855        111,913,715   
    December 31,  
  2009     2008     2007     2006     2005  
  (in millions)  

Balance Sheets Data:

         

Cash and cash equivalents and financial investments (2)

  $ 902      $ 601      $ 1,325      $ 1,950      $ 345   

Total assets (2)

    10,722        12,752        2,979        3,716        2,047   

Total long-term liabilities (2)

    2,896        3,372        360        1,798        1,467   

Total equity

    4,944        4,303        2,208        1,457        253   

 

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(1)

We record execution revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues.

(2)

At December 31, 2006, cash and cash equivalents and financial investments included our investment in shares of LSE. Unrealized gains and losses, including foreign currency gains, were included in accumulated other comprehensive income until the sale of the shares in September 2007. On September 25, 2007, we completed the sale of shares at that time representing 28.0% of the share capital of LSE to Borse Dubai for $1.6 billion in cash. We sold the remaining substantial balance of our holdings in LSE in open market transactions for approximately $194 million in cash on September 26, 2007 for total proceeds of $1.8 billion. As a result of the sale, we recognized a $431 million pre-tax gain which is net of $18 million of costs directly related to the sale, primarily broker fees. On September 28, 2007, we used approximately $1.1 billion of the proceeds from the above transactions to repay in full and terminate our former credit facilities.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of the financial condition and results of operations of NASDAQ OMX in conjunction with our consolidated financial statements and related notes included in this Form 10-K, as well as the discussion under “Item 1A. Risk Factors.”

 

Overview

 

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008 and certain businesses of Nord Pool in October 2008. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 20% aggregate equity interest in Agora-X (13.3% in March 2008 and an additional 6.7% in December 2008). In January 2009, we acquired a 22% equity interest in EMCF and in December 2009, we entered into an agreement to increase our ownership interest in Agora-X to 85% resulting in a majority stake. The financial results of these transactions are included in the consolidated financial results beginning on the date of each acquisition or strategic initiative.

 

Financial Highlights

 

The comparability of our operating results for the year ended December 31, 2009 to the same periods in 2008 and 2007 is significantly impacted by our business combination with OMX AB as well as the acquisition of PHLX and our Nord Pool transaction. In our discussion and analysis of results of operations, we have quantified the contribution of additional revenues or expenses resulting from the operations of OMX, NASDAQ OMX PHLX and NASDAQ OMX Commodities wherever such amounts were material. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts.

 

In addition, fluctuations in the value of foreign currencies relative to the U.S. dollar impacted our operating results. Impacts associated with fluctuations in foreign currency are discussed in more detail under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” For the year ended December 31, 2009, approximately 34.5% of our revenues less liquidity rebates, brokerage, clearance and exchange fees and 21.2% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro and Norwegian Krone.

 

In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. The following discussion of results of operations eliminates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current year’s results by the prior period’s exchange rates.

 

The following summarizes significant changes in our financial performance for the year ended December 31, 2009 when compared with the same period in 2008:

 

   

Revenues less liquidity rebates, brokerage, clearance and exchange fees decreased $7 million, or 0.5%, to $1,453 million in 2009, compared with $1,460 million in 2008, reflecting an unfavorable impact from foreign exchange of $45 million, partially offset by a $38 million increase due to operational growth. The operational growth was primarily due to:

 

   

an increase in derivative trading and clearing revenues mainly due to:

 

   

the inclusion of NASDAQ OMX PHLX’s derivative trading revenues for the full twelve-month period in 2009 compared to five months in 2008 combined with an increase in market share; and

 

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the inclusion of NASDAQ OMX Commodities derivative trading and clearing revenues for the full twelve-month period in 2009 compared to two months in 2008;

 

   

an increase in Market Technology revenues mainly due to:

 

   

the inclusion of revenues for the full twelve-month period in 2009 compared to ten months in 2008 as well as increased deliveries of market technology contracts during 2009; and

 

   

an increase in access services revenues mainly due to:

 

   

revised fees for access services and increases in customer demand for network connectivity as well as continued expansion of our co-location services and the inclusion of NASDAQ OMX PHLX’s access services revenues for the full twelve-month period in 2009 compared to five months in 2008.

 

The increase in operational growth was partially offset by a decrease in U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees due to a decrease in the number of shares matched and routed on NASDAQ’s trading system and a decrease in Issuer Services revenues primarily due to lower annual renewal fees resulting from fewer listed companies.

 

   

Operating expenses increased $30 million, or 3.7%, to $850 million in 2009, compared with $820 million in 2008, reflecting an increase in operating expenses of $63 million, partially offset by a favorable impact from foreign exchange of $33 million. The increase in operating expenses was primarily due to the inclusion of OMX’s operating expenses for the full twelve-month period in 2009 compared to ten months in 2008, as well as the inclusion of NASDAQ OMX PHLX’s operating expenses for the full twelve-month period in 2009 compared to five months in 2008.

 

   

Net interest expense increased $27 million, or 43.5%, to $89 million in 2009, compared with $62 million in 2008, primarily reflecting a full twelve months of interest expense in 2009 for the debt outstanding related to our business combination with OMX AB compared to ten months of debt outstanding in 2008. In addition, interest expense increased due to an increase in our outstanding debt obligations related to the acquisitions of PHLX and certain businesses of Nord Pool that were completed in the second half of 2008.

 

   

Income (loss) from unconsolidated investees, net was a net loss of $107 million in 2009, compared with net income of $27 million in 2008. The net loss for 2009 is primarily due to $87 million of impairment charges ($82 million on our NASDAQ Dubai investment and $5 million on our Agora-X investment), as well as a $19 million loss related to the sale of our share capital in Orc Software AB, or Orc. The net income for 2008 was primarily related to the NASDAQ Dubai transaction.

 

   

Debt conversion expense was $25 million for 2009 and was related to the conversion of most of our 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the present value of series A convertible preferred stock issued totaling $15 million, and debt issuance and other costs of $1 million.

 

   

Asset impairment charges of $42 million in 2008 were due to a non-cash other-than-temporary impairment charge of $35 million related to a long-term available-for-sale investment security and a non-cash impairment loss of $7 million from the write-down of finite-lived intangible assets, primarily related to our insurance agency business.

 

   

Loss on foreign currency contracts, net of $58 million in 2008 was primarily related to the Nord Pool acquisition and losses on forward currency contracts used to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams partially offset by gains on foreign currency contracts related to our business combination with OMX AB.

 

These current and prior year items are discussed in more detail below.

 

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Business Environment

 

We serve listed companies, market participants and investors by providing high quality cash equity, fixed-income and derivative markets, thereby facilitating economic growth and corporate entrepreneurship. We also provide market technology to exchanges and markets around the world. In broad terms, our business performance is impacted by a number of drivers including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for primary and secondary equity markets, and the changing technology in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends including:

 

   

Trading volumes, particularly in U.S. and Nordic equity and derivative securities, which are driven primarily by overall macroeconomic conditions;

 

   

The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy, availability of diverse sources of financing, and tax and regulatory policies;

 

   

The ability of the credit markets to provide liquidity to our technology customers, suppliers, trading participants, and listed companies;

 

   

The financial well being of existing market participants following the financial, organizational, and operational stresses of the recent past;

 

   

The emergence of new market participants seeing opportunities in the recovering global economy;

 

   

The ability of our fixed-income issuers’ to access the credit markets;

 

   

The increasing optimism of our technology customers arising from the recent securities market rise and economic stabilization;

 

   

Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe;

 

   

Competition for listings and trade executions related to pricing, and product and service offerings; and

 

   

Other technological advancements and regulatory developments.

 

Currently our business drivers are characterized by improvement in investors’ outlook for financial institutions and global economic growth, continued declines in the levels of market volatility, emerging industry reaction to regulatory initiatives and continued rapid evolution and deployment of new technology in the financial services industry. The business environment that influenced our financial performance for the full year of 2009 can be characterized as follows:

 

   

A modestly increased pace for new equity issuance relative to 2008 in the U.S. with 67 IPOs across all exchanges in the U.S. and 33 new IPOs on The NASDAQ Stock Market. IPO activity remained severely depressed in the Nordics with one IPO on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic;

 

   

Extremely limited access to debt and equity capital for both new and established companies during the first half of the year with marked improvement over the course of the year;

 

   

A 21% reduction in activity experienced by The NASDAQ Stock Market relative to 2008 in U.S. equity matched shares, partially offset by the share volume growth of NASDAQ OMX BX. Matched share volume for all our U.S. markets declined 15% in 2009 driven by decreased trading levels resulting from diminished volatility, a loss of market share and a decline in overall activity relative to the highly elevated trading levels of 2008 due to the financial crisis;

 

   

A 0.5% decrease relative to 2008 in the number of equity transactions on our Nordic and Baltic exchanges driven by decreased participant trading in response to changed economic conditions;

 

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A 27% decrease relative to 2008 in the value of equity transactions on our Nordic and Baltic exchanges resulting from lower equity valuations, lower trading activity due to diminished volatility and the relative return of overall trading activity to levels predating the financial crisis;

 

   

A 23% decline experienced by our Nordic and Baltic exchanges relative to 2008 in number of traded derivatives contracts in equity related products (excluding EDX London Limited, or EDX, and Eurex) driven by reduced volatility and by the changed economic climate;

 

   

A 15% decrease relative to 2008 in number of cleared derivatives contracts in fixed-income related products on our Nordic and Baltic exchanges;

 

   

Intense competition among U.S. exchanges for both equity trading volume and listings, and strong competition between MTFs and exchanges in Europe for equity trading volume;

 

   

Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets;

 

   

Consolidation of major global customers as financial institutions are acquired, merged, and restructured; and

 

   

Market trends requiring continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies surface, and as emerging countries show ongoing interest in developing their financial markets.

 

2010 Outlook

 

We launched several strategic initiatives during 2009 which should benefit us during the challenging economic environment anticipated for 2010. For the second year in a row, more share value traded on The NASDAQ Stock Market than on any other single equities exchange in the world. Our platform continues to stand out as a reliable, flexible, and high capacity system delivering high levels of execution quality and speed under even the extremely demanding market conditions that existed in the first half of 2009. We continued to expand the application of our U.S. INET trading system with the successful launch of NASDAQ OMX BX equities and the re-platforming of NASDAQ OMX PHLX options in 2009. The standout performance and flexibility of our technology has enabled us to enter new markets with a low cost and highly regarded platform offering strong performance to both existing and new clients and creating additional sales opportunities to both our Transactions Services and Market Data businesses.

 

Our experiences with applying INET technology to The NASDAQ Options Market, NASDAQ OMX BX equities, NASDAQ OMX PHLX options and NASDAQ OMX Europe equities form the basis for our domestic outlook for 2010. By using NASDAQ OMX high performance systems, NASDAQ OMX BX became the fastest growing U.S. stock exchange in 2009 and is currently the fifth largest U.S. equity exchange. The flexibility of INET technology has been demonstrated by its ability to power the NASDAQ OMX PHLX options market as a complementary market to The NASDAQ Options Market but at a significantly reduced technology-related cost. We intend to further leverage the flexibility of INET to launch a new equities market, subject to SEC approval, using the NASDAQ OMX PHLX license, which will prioritize trading according to price and order size, thereby offering an exchange alternative to institutional and block traders. Our investment in IDCG created an opportunity for entering the clearing business for interest rate swap products.

 

In February 2010, we replaced the matching technology of the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic with the INET technology platform, thereby providing the benefits of INET to these marketplaces and demonstrating the flexibility of the INET system to power exchanges outside the U.S. We expect the extension of our world class technology systems, such as INET, across our exchanges to further enhance our competitive position and to open new opportunities for technology sales.

 

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At the end of 2009, there were signs of a recovery in the IPO market and we expect the demand for public equity capital from companies seeking to position themselves for a return of global economic growth to power further increases in the number of IPOs. Furthermore, an improved outlook for equity investments and the number of recession-proven private companies seeking capital will add to the IPO pipeline in 2010. We continue to leverage the opportunities in market data brought about by the breadth of NASDAQ OMX’s data distribution capabilities by offering new data products to our customer base and by strengthening our direct relationships with those customers.

 

We believe that the most challenging economic conditions in this cycle are behind us and the year ahead will likely prove more positive for our business drivers and our operations. We believe that our aggressive steps in meeting our cost, revenue, and technology synergies in 2008 and 2009 will enable us to benefit from improving economic conditions in 2010. We expect to further diversify our business with enhanced product offerings and/or acquisitions which are complementary to our existing businesses.

 

Business Segments

 

We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology.

 

   

The Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business.

 

   

The Issuer Services segment includes our Global Listing Services and the Global Index Group businesses. The companies listed on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop industry-specific and other indexes that we use to develop and license NASDAQ OMX branded indexes, associated derivatives and index products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Services business.

 

   

The Market Technology segment provides technology solutions for trading, clearing and settlement, and information dissemination, and also offers facility management integration and advisory services.

 

Our management allocates resources, assesses performance and manages these businesses as three separate segments. See Note 18, “Segments,” to the consolidated financial statements for further discussion.

 

Sources of Revenues and Cost of Revenues

 

Market Services Revenues

 

Transaction Services

 

U.S. Cash Equity Trading

 

U.S. cash equity trading revenues are variable, based on service volumes, and recognized as transactions occur. We charge transaction fees for executing cash equity trades in NASDAQ-listed and other listed securities on The NASDAQ Stock Market and NASDAQ OMX BX as well as on orders that are routed to other market venues for execution.

 

We credit a portion of the per share execution charge to the market participant that provides the liquidity and record the liquidity rebate as a cost of revenues in the Consolidated Statements of Income. These liquidity rebates are paid on a monthly basis and the amounts due are included in accounts payable and accrued expenses in the Consolidated Balance Sheets. Also, we pay Section 31 fees to the SEC for supervision and regulation of

 

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securities markets. We pass these costs along to our customers through our cash equity trading fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ’s and NASDAQ OMX BX’s platforms and we recognize these amounts in cost of revenues when invoiced. Section 31 fees received are included in cash and cash equivalents in the Consolidated Balance Sheets at the time of receipt and, as required by law, the amount due to the SEC is remitted semiannually and recorded as Section 31 fees payable to the SEC in the Consolidated Balance Sheets until paid. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less liquidity rebates, brokerage, clearance and exchange fees. As we hold the cash received until payment to the SEC, we earn interest income on the related cash balances.

 

European Cash Equity Trading

 

We charge transaction fees for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as on NASDAQ OMX Europe. The transaction fee for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic is charged per executed order and as per value traded. European cash equity trading revenues on NASDAQ OMX Europe are variable, based on service volumes, and recognized as transactions occur.

 

U.S. Derivative Trading

 

U.S. derivative trading revenues are variable, based on service volumes, and recognized as transactions occur. The principal types of derivative contracts traded on NASDAQ OMX PHLX and The NASDAQ Options Market are equity options, index options and currency options. In the U.S., we also operate NFX, which offers trading for currency futures and other financial futures.

 

Similar to U.S. cash equity trading, we credit a portion of the per share execution charge to the market participant that provides the liquidity and record the liquidity rebate as a cost of revenues in the Consolidated Statements of Income. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. See “U.S. Cash Equity Trading” above for further discussion.

 

European Derivative Trading and Clearing

 

European derivative trading and clearing revenues are also variable, based on service volumes and recognized as transactions occur. Derivative trading and clearing is conducted on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen. The principal types of derivative contracts traded are stock options and futures, index options and futures, fixed-income options and futures and stock loans. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk.

 

European derivative trading and clearing revenues also include commodities clearing revenues. NASDAQ OMX Commodities, together with third party partner Nord Pool, provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. NASDAQ OMX Commodities offers international derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Nord Pool is responsible for exchange operations and trading activities. Our clearing revenues from trading transactions on Nord Pool are variable, based on service volumes and recognized as they are cleared. We also have clearing revenues for contracts traded on the OTC derivative market which are also recognized when contracts are cleared.

 

In February 2010, the board of directors of Nord Pool exercised their put option to sell Nord Pool’s Nordic power derivatives operations to NASDAQ OMX, subject to regulatory approval. See “Acquisition of Nordic Power Derivatives Operations,” of Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion.

 

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Access Services

 

We generate revenues by providing market participants with several alternatives for accessing our markets for a fee. The type of connectivity is determined by the level of functionality a customer needs. As a result, access services revenues vary depending on the type of connection provided to customers. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Revenues for providing access to our markets, co-location services and revenues for monthly exchange membership and registration fees are recognized on a monthly basis as the service is provided. Revenues from annual fees for exchange membership and registration fees are recognized ratably over the following 12-month period.

 

Market Data

 

Market Data revenues are earned from U.S. tape plans and U.S. and European proprietary market data products.

 

Net U.S. Tape Plans

 

Revenues from U.S. tape plans include eligible UTP Plan revenues which are shared among UTP Plan participants. Under the revenue sharing provision of the UTP Plan, we are permitted to deduct costs associated with acting as the exclusive Securities Information Processor from the total amount of tape fees collected. After these costs are deducted from the tape fees, we distribute to the respective UTP Plan participants, including The NASDAQ Stock Market and NASDAQ OMX BX, their share of tape fees based on a formula, required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape fees for information on NYSE- and NYSE Amex-listed securities. Revenues from net U.S. tape plans are recognized on a monthly basis.

 

U.S. Market Data Products

 

We collect and process information and earn revenues as a distributor of our market data. We provide varying levels of quote and trade information to data distributors, who in turn sell subscriptions for this information to the public. We earn revenues primarily based on the number of data subscribers and distributors of our data. U.S. Market Data revenues are recognized on a monthly basis. These revenues, which are subscription based, are recorded net of amounts due under revenue sharing arrangements with market participants.

 

European Market Data Products

 

European Market Data revenues, which are subscription based, are generated primarily through the sale and distribution of trading information based on data generated through trading on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and are recognized on a monthly basis.

 

Broker Services

 

Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. The primary services offered are flexible back-office systems. Our services allow customers to entirely or partly outsource their company’s back-office functions. Revenues from broker services are based on a fixed basic fee for administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Broker Services revenues are recognized on a continuous basis as services are rendered. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million which is included in gain on sales of businesses in the Consolidated Statements of Income. The sale of our Broker Services operations in the United Kingdom will not have a material impact on our future consolidated results of operations.

 

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Issuer Services Revenues

 

Global Listing Services

 

Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees are recognized ratably over the following 12-month period. Listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration. European listing fees, which are comprised of revenues derived from annual fees received from companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, are directly related to the listed companies’ market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period.

 

Global Listing Services revenues also include fees from Corporate Services which include subscription income from Shareholder.com and Directors Desk, fees from GlobeNewswire and revenues from Corporate Services Nordic. Prior to October 2009, Corporate Services revenues also included commission income from our Carpenter Moore insurance agency business. In October 2009, we sold substantially all of our Carpenter Moore insurance agency business and recorded a gain of $7 million, which is included in gain on sales of businesses in the Consolidated Statements of Income. The sale of our Carpenter Moore business will not have a material impact on our future consolidated results of operations. Fee income for services other than placement of insurance coverage is recognized as those services are provided. Broker commission adjustments and commissions on premiums billed directly by underwriters were recognized when such amounts could be reasonably estimated. Shareholder.com revenues are based on subscription agreements with customers. Revenues from subscription agreements are recognized ratably over the contract period, generally one year in length. As part of subscription services, customers also are charged usage fees based upon actual usage of the services provided. Revenues from usage fees and other services are recognized when earned. Directors Desk revenues are based on subscriptions for online services for directors. Subscriptions are one year in length and revenues are recognized ratably over the year. GlobeNewswire generates fees primarily from wire distribution services, and revenues are recognized as services are provided. For our insurance agency business, commission income was recognized when coverage became effective, the premium due under the policy was known or could be reasonably estimated, and substantially all required services related to placing the insurance had been provided.

 

Global Index Group

 

We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group business. Revenues primarily include license fees from these branded indexes, associated derivatives and financial products in the U.S. and abroad. We also generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs. We primarily have two types of license agreements: transaction-based licenses and asset-based licenses. Transaction-based licenses are generally renewable long-term agreements. Customers are charged based on transaction volume or a minimum contract amount, or both. If a customer is charged based on transaction volume, we recognize revenue when the transaction occurs. If a customer is charged based on a minimum contract amount, we recognize revenue on a pro-rata basis over the licensing term. Asset-based licenses also are generally long-term agreements. Customers are charged based on a percentage of assets under management for licensed products, per the agreement, on a monthly or quarterly basis. These revenues are recorded on a monthly or quarterly basis over the term of the license agreement.

 

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Market Technology Revenues

 

The Market Technology segment delivers technology and services to marketplaces throughout the world. Market Technology provides technology solutions for trading, clearing and settlement, and information dissemination, and also offers facility management integration and advisory services. Revenues are derived from three primary sources: licensing, support and project revenues, facility management services revenues and other revenues.

 

License, support and project revenues are derived from the system solutions developed and sold by NASDAQ OMX. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of Vendor Specific Objective Evidence, or VSOE, of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered.

 

Many projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We include the deferral of this revenue in other liabilities and the deferral of costs in other assets in the Consolidated Balance Sheets.

 

When significant production, modification or customization of our software is not required, revenue and costs are recognized over the entire term of the arrangement, once the software has been delivered and services have commenced. We include the deferral of this revenue in other liabilities and the deferral of costs in other assets in the Consolidated Balance Sheets.

 

In addition, Market Technology license, support and project revenues also include amortization of the deferred revenue related to our contribution of technology licenses to NASDAQ Dubai. See “Combination with OMX AB and Strategic Partnership with Borse Dubai Limited,” of Note 3, “Acquisitions and Strategic Initiatives,” to the consolidated financial statements for further discussion of our transaction with NASDAQ Dubai.

 

Facility management services revenues are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management services revenues which can be both fixed and volume-based. Facility management services revenues are recognized as services are rendered over the contract period after delivery has occurred.

 

Other revenues include advisory services that are recognized in revenue when earned.

 

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NASDAQ OMX’s Operating Results

 

Key Drivers

 

The following table includes key drivers for our Market Services, Issuer Services, and Market Technology segments. In evaluating the performance of our business, our senior management closely watches these key drivers.

 

     Year Ended December 31,  
       2009             2008             2007      

Market Services

      

Cash Equity Trading

      

NASDAQ securities

      

Average daily share volume (in billions)

     2.24        2.28      2.17   

Matched market share executed on NASDAQ

     33.0     43.2   46.1

Matched market share executed on NASDAQ OMX BX

     1.4     —        —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility (1)

     36.6     22.6   25.3

Total market share (2)

     71.0     65.8   71.4

NYSE securities

      

Average daily share volume (in billions)

     5.64        5.06      3.32   

Matched market share executed on NASDAQ

     15.7     22.2   17.1

Matched market share executed on NASDAQ OMX BX

     1.9     —        —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility (1)

     32.1     19.3   18.0

Total market share (2)

     49.6     41.5   35.1

NYSE Amex and regional securities

      

Average daily share volume (in billions)

     1.89        1.49      0.59   

Matched market share executed on NASDAQ

     24.4     35.1   33.3

Matched market share executed on NASDAQ OMX BX

     1.4     —        —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility (1)

     32.1     16.2   19.3

Total market share (2)

     57.9     51.4   52.7

Total U.S.-listed equities

      

Matched share volume (in billions)

     566.6        665.9      442.0   

Matched market share executed on NASDAQ

     21.3     29.8   29.1

Matched market share executed on NASDAQ OMX BX

     1.7     —        —     

NASDAQ OMX Nordic and NASDAQ OMX Baltic

      

Average daily number of equity trades

     212,465        213,481      —     

Average daily value of shares traded (in billions)

   $ 3.1      $ 5.0      —     

Derivative Trading and Clearing

      

U.S. Equity Options

      

Average daily volume (in millions)

     13.4        13.0      —     

NASDAQ OMX PHLX matched market share

     17.9     16.4   —     

The NASDAQ Options Market matched market share

     3.1     1.0   —     

NASDAQ OMX Nordic and NASDAQ OMX Baltic

      

Average Daily Volume:

      

Equity option and fixed-income contracts

     329,350        418,773      —     

Nordic equity option contracts traded on EDX

     95,374        153,686      —     

Finnish option contracts traded on Eurex

     77,312        73,870      —     

NASDAQ OMX Commodities

      

Clearing Turnover:

      

Power contracts (TWh) (3)

     2,138        409      —     

Carbon contracts (1000 tCO2) (3)

     45,963        13,261      —     

 

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     Year Ended December 31,
       2009            2008            2007    

Issuer Services

        

Initial public offerings:

        

NASDAQ

     33      13    132

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

     1      17    —  

New listings:

        

NASDAQ (4)

     131      177    290

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

     12      28    —  

Number of listed companies:

        

NASDAQ (5)

     2,852      3,023    3,135

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic (6)

     797      824    —  

Market Technology

        

Order intake (in millions) (7)

   $ 204    $ 229    —  

Total order value (in millions) (8)

   $ 417    $ 359    —  

 

(1)

Transactions reported to the FINRA/NASDAQ Trade Reporting Facility.

(2)

Includes transactions executed on both NASDAQ’s and NASDAQ OMX BX’s systems plus trades reported through the FINRA/NASDAQ Trade Reporting Facility.

(3)

Transactions executed on Nord Pool and reported for clearing to NASDAQ OMX Commodities measured by Terawatt hours (TWh) and one thousand metric tons of carbon dioxide (1000 tCO2).

(4)

New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETFs.

(5)

Number of listed companies for NASDAQ at period end, including separately listed ETFs.

(6)

Represents companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets, NASDAQ OMX First North, at period end.

(7)

Total contract value of orders signed.

(8)

Represents total contract value of orders signed that are yet to be recognized as revenue.

 

Segment Operating Results

 

Of our 2009 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,453 million, 67.0% was from our Market Services segment, 22.3% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.7% related to other revenues. Of our 2008 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,460 million, 67.5% was from our Market Services segment, 23.5% was from our Issuer Services segment, 8.2% was from our Market Technology segment and 0.8% related to other revenues. Of our 2007 revenues less liquidity rebates, brokerage, clearance and exchange fees of $812 million, 65.0% was from our Market Services segment and 35.0% was from our Issuer Services segment.

 

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The following table shows our total revenues, cost of revenues and revenues less liquidity rebates, brokerage, clearance and exchange fees by segment:

 

     Year Ended December 31,     Percentage Change  
     2009     2008     2007     2009 vs. 2008     2008 vs. 2007  
     (in millions)              

Market Services

   $ 2,929      $ 3,176      $ 2,152      (7.8 )%    47.6

Cost of revenues

     (1,956     (2,190     (1,624   (10.7 )%    34.9
                                    

Market Services revenues less liquidity rebates, brokerage, clearance and exchange fees

     973        986        528      (1.3 )%    86.7

Issuer Services

     324        343        284      (5.5 )%    20.8

Market Technology

     145        119        —        21.8   #   

Other

     11        12        —        (8.3 )%    #   
                                    

Total revenues less liquidity rebates, brokerage, clearance and exchange fees

   $ 1,453      $ 1,460      $ 812      (0.5 )%    79.8
                                    

 

# Denotes a variance equal to or greater than 100.0%.

 

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MARKET SERVICES

 

The following table shows total revenues less liquidity rebates, brokerage, clearance and exchange fees from our Market Services segment:

 

     Year Ended December 31,     Percentage Change  
     2009     2008     2007     2009 vs. 2008     2008 vs. 2007  
     (in millions)              

Transaction Services

          

Cash Equity Trading Revenues:

          

U.S. cash equity trading (1)

   $ 2,010      $ 2,412      $ 1,806      (16.7 )%    33.6

Cost of revenues:

          

Liquidity rebates

     (1,394     (1,718     (1,050   (18.9 )%    63.6

Brokerage, clearance and exchange fees (1)

     (465     (444     (574   4.7   (22.6 )% 
                                    

Total U.S. cash equity cost of revenues

     (1,859     (2,162     (1,624   (14.0 )%    33.1
                                    

U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees

     151        250        182      (39.6 )%    37.4

European cash equity trading

     99        116        —        (14.7 )%    #   
                                    

Total cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees

     250        366        182      (31.7 )%    #   
                                    

Derivative Trading and Clearing Revenues:

          

U.S. derivative trading (2)

     232        93        —        #      #   

Cost of revenues:

          

Liquidity rebates

     (81     (26     —        #      #   

Brokerage, clearance and exchange fees (2)

     (16     (2     —        #      #   
                                    

Total U.S. derivative trading cost of revenues

     (97     (28     —        #      #   
                                    

U.S. derivative trading revenues less liquidity rebates, brokerage, clearance and exchange fees

     135        65        —        #      #   
                                    

European derivative trading and clearing revenues

     87        64        —        35.9   #   
                                    

Total derivative trading and clearing revenues less liquidity rebates, brokerage, clearance and exchange fees

     222        129        —        72.1   #   
                                    

Access Services Revenues

     138        112        77      23.2   45.5
                                    

Total Transaction Services revenues less liquidity rebates, brokerage, clearance and exchange fees

     610        607        259      0.5   #   
                                    

Market Data

          

Net U.S. tape plans

     128        146        150      (12.3 )%    (2.7 )% 

U.S. market data products

     116        107        90      8.4   18.9

European market data products

     78        77        —        1.3   #   
                                    

Total Market Data revenues

     322        330        240      (2.4 )%    37.5
                                    

Broker Services

     32        41        —        (22.0 )%    #   
                                    

Other Market Services

     9        8        29      12.5   (72.4 )% 
                                    

Total Market Services revenues less liquidity rebates, brokerage, clearance and exchange fees

   $ 973      $ 986      $ 528      (1.3 )%    86.7
                                    

 

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# Denotes a variance equal to or greater than 100.0%.
(1)

Includes Section 31 fees of $314 million in 2009, $207 million in 2008, and $365 million in 2007. Section 31 fees are recorded as U.S. cash equity trading revenues with a corresponding amount recorded in cost of revenues.

(2)

Includes Section 31 fees of $14 million in 2009 and $2 million in 2008. Section 31 fees are recorded as U.S. derivative trading revenues with a corresponding amount recorded in cost of revenues.

 

Transaction Services

 

Transaction Services revenues less liquidity rebates, brokerage, clearance and exchange fees increased in 2009 compared with 2008 and increased in 2008 compared with 2007. The increase in 2009 was primarily due to increases in derivative trading and clearing revenues less liquidity rebates, brokerage, clearance and exchange fees and access services revenues. Partially offsetting these increases was a decrease in cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees. The increase in 2008 was primarily due to an increase in cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees, an increase in derivative trading and clearing revenues less liquidity rebates, brokerage, clearance and exchange fees and an increase in access services revenues.

 

U.S. Cash Equity Trading Revenues

 

U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees decreased in 2009 compared with 2008 and increased in 2008 compared with 2007. The decrease in 2009 was primarily due to declines in matched share volume on NASDAQ’s trading system and the average net fee per share matched on NASDAQ’s trading system. The increase in 2008 was primarily due to an increase in matched share volume on NASDAQ’s trading system due to competitive pricing and systems capacity advantages.

 

U.S. cash equity trading revenues decreased in 2009 compared with 2008 and increased in 2008 compared with 2007. The decrease in 2009 was primarily due to declines in matched share volume on NASDAQ’s trading system, partially offset by higher Section 31 revenues due to higher rates charged by us to customers beginning in the second quarter of 2009. The increase in 2008 was primarily due to an increase in matched share volume on NASDAQ’s trading system primarily due to competitive pricing and systems capacity advantages, partially offset by lower Section 31 revenues due to lower rates charged by us to customers beginning in the first quarter of 2008.

 

As discussed above, we record Section 31 fees as cash equity trading revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less liquidity rebates, brokerage, clearance and exchange fees. Section 31 fees were $314 million in 2009, $207 million in 2008 and $365 million in 2007. The increase in 2009 compared to 2008 is primarily due to higher Section 31 fee rates in 2009. The decrease in 2008 compared with 2007 is primarily due to lower Section 31 fee rates in 2008.

 

Liquidity rebates, in which we credit a portion of the per share execution charge to the market participant that provides the liquidity, decreased in 2009 compared with 2008 and increased in 2008 compared with 2007. The decrease in 2009 was primarily due to a lower number of shares matched on NASDAQ’s trading system, partially offset by an increase in the amount of the rebate offered to liquidity providers. The increase in liquidity rebates in 2008 was primarily due to an increase in the number of shares matched on NASDAQ’s trading system.

 

Brokerage, clearance and exchange fees increased in 2009 compared with 2008 and decreased in 2008 compared with 2007. The increase in 2009 was primarily due to higher Section 31 fee rates, partially offset by lower routing costs due to a decrease in the amount of volume routed by NASDAQ and lower fees incurred from NSCC. The decrease in 2008 was primarily due to lower rates charged on Section 31 fees in 2008.

 

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European Cash Equity Trading Revenues

 

European cash equity trading revenues include trading revenues from equity products traded on NASDAQ OMX Europe and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. European cash equity trading revenues decreased in 2009 compared with 2008, primarily due to a decrease in the value traded per day due to lower average market capitalization of stocks traded, partially offset by the inclusion of European cash equity trading revenues for the full twelve-month period in 2009 compared to ten months in 2008. In addition, foreign exchange negatively impacted European cash equity trading revenues by $11 million in 2009.

 

U.S. Derivative Trading Revenues

 

U.S. derivative trading revenues and revenues less liquidity rebates, brokerage, clearance and exchange fees increased in 2009 compared with 2008 primarily due to the inclusion of NASDAQ OMX PHLX’s derivative trading revenues of $196 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s derivative trading revenues totaling $78 million for 2008. In addition, an increase in market share contributed to these increases.

 

As discussed above, Section 31 fees are recorded as derivative trading revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less liquidity rebates, brokerage, clearance and exchange fees. Section 31 fees were $14 million in 2009 compared with $2 million 2008.

 

Liquidity rebates, in which we credit a portion of the per share execution charge to the market participant that provides the liquidity, increased in 2009 compared with 2008 primarily due to the inclusion of NASDAQ OMX PHLX’s liquidity rebates of $61 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s liquidity rebates totaling $17 million in 2008. The increase in liquidity rebates also was due to an increase in market share as discussed above.

 

Brokerage, clearance and exchange fees increased in 2009 compared with 2008 primarily due to the inclusion of NASDAQ OMX PHLX’s brokerage, clearance and exchange fees of $11 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s brokerage, clearance and exchange fees totaling $2 million in 2008.

 

European Derivative Trading and Clearing Revenues

 

European derivative trading and clearing revenues include trading and clearing revenues from derivative products traded on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen and also include revenues from NASDAQ OMX Commodities. European derivative trading and clearing revenues increased in 2009 compared with 2008 primarily due to the growth in cleared energy products and the transfer of derivative volume from EDX to NASDAQ OMX. European derivative trading and clearing revenues include:

 

   

cleared energy and carbon products revenues of $35 million for the full twelve-month period in 2009 compared with $6 million for the two-month period included in 2008;

 

   

trading and clearing revenues for stock and index derivatives of $33 million in 2009 compared with $41 million in 2008;

 

   

clearing revenues from fixed income products of $13 million in 2009 and 2008; and

 

   

other revenues and fees of $6 million in 2009 compared with $4 million in 2008. During 2009, we began providing trading and clearing operations to a new Dutch trading platform called TOM, which primarily contributed to the increase in other revenues and fees.

 

The above was partially offset by an unfavorable impact from foreign exchange of $4 million in 2009.

 

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Access Services Revenues

 

Access services revenues increased in 2009 compared with 2008 primarily due to: (i) revised fees for access services, (ii) increases in customer demand for network connectivity, (iii) continued expansion of our co-location services and (iv) the inclusion of NASDAQ OMX PHLX’s access services revenues of $15 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s access services revenues totaling $10 million in 2008.

 

Access services revenues increased in 2008 compared with 2007 primarily due to increases in customer demand for network connectivity, higher exchange and other membership fees and the inclusion of NASDAQ OMX PHLX’s access services revenues of $10 million in 2008.

 

Market Data

 

Market Data revenues decreased in 2009 compared with 2008 primarily due to a decrease in net U.S. tape plans revenues, partially offset by increases in U.S. market data products revenues and the inclusion of European market data products revenues for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by an unfavorable impact from foreign exchange of $6 million.

 

The decline in net U.S. tape plans revenues in 2009 was primarily due to a decline in NASDAQ’s trading and quoting market share of U.S. equities and a reduction in the size of the tape plans revenue pools.

 

The increase in U.S. market data products revenues in 2009 was primarily due to growth of products such as the NASDAQ Global Index Data Service, which was launched in the first quarter of 2009, NASDAQ Last Sale, which was launched in the second quarter of 2008, and other proprietary data products.

 

Market Data revenues increased in 2008 compared with 2007 primarily due to an increase in U.S. market data products revenues and the inclusion of European market data products revenues of $77 million, partially offset by a smaller decrease in net U.S. tape plan revenues.

 

The increase in U.S. market data products revenues in 2008 was primarily due to revenues from OpenView Basic, which was launched in the second quarter of 2007, revenues from NASDAQ Last Sale, which was launched in 2008, and growth from other proprietary data products including TotalView, Open View and Level 2.

 

Net U.S. tape plan revenues decreased in 2008 compared with 2007 primarily due to a decrease in our share of trading and quoting activity in NASDAQ-listed securities through the UTP Plan, partially offset by increases in our share of trading and quoting activity in NYSE-listed securities. Our tape fee revenue sharing amount allocated to UTP plan participants increased in 2008 compared to 2007 primarily due to a reduction of our percentage earned of the UTP revenue caused, in part by the Regulation NMS market data revenue allocation formula, which became effective April 1, 2007.

 

Broker Services

 

Broker Services revenues decreased in 2009 compared with 2008 primarily due to an unfavorable impact from foreign exchange of $6 million and the sale of our Broker Services operations in the United Kingdom to TD Waterhouse in November 2009.

 

Other Market Services Revenues

 

Other Market Services revenues increased in 2009 compared with 2008 and decreased in 2008 compared with 2007. The decrease in 2008 was primarily due to certain other market services revenues now reported as Market Technology revenues.

 

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ISSUER SERVICES

 

The following table shows revenues from our Issuer Services segment:

 

     Year Ended December 31,    Percentage Change  
         2009            2008            2007        2009 vs. 2008     2008 vs. 2007  
     (in millions)             

Global Listing Services:

             

Annual renewal fees

   $ 117    $ 125    $ 125    (6.4 )%    —     

Listing of additional shares fees

     37      40      41    (7.5 )%    (2.4 )% 

Initial listing fees

     20      22      22    (9.1 )%    —     
                                 

Total U.S. listing fees

     174      187      188    (7.0 )%    (0.5 )% 

European listing fees

     45      48      —      (6.3 )%    #   

Corporate Services

     66      64      53    3.1   20.8
                                 

Total Global Listing Services

     285      299      241    (4.7 )%    24.1

Global Index Group

     39      44      43    (11.4 )%    2.3
                                 

Total Issuer Services revenues

   $ 324    $ 343    $ 284    (5.5 )%    20.8
                                 

 

# Denotes a variance equal to or greater than 100.0%.

 

Global Listing Services

 

U.S. Listing Services Revenues

 

Annual renewal fees decreased in 2009 compared with 2008, primarily due to a decrease in the number of listed companies on The NASDAQ Stock Market. The number of companies listed on The NASDAQ Stock Market on January 1, 2009 was 3,023, compared to 3,135 on January 1, 2008, the date on which listed companies were billed their annual fees. The decrease in the number of listed companies was due to 289 delistings from The NASDAQ Stock Market in 2008, partially offset by 177 new listings in 2008.

 

Annual renewal fees were flat in 2008 compared with 2007. The number of companies listed on The NASDAQ Stock Market on January 1, 2008 was 3,135, compared to 3,193 on January 1, 2007, the date on which listed companies were billed their annual fees. The decrease in the number of listed companies was due to 348 delistings from The NASDAQ Stock Market in 2007, partially offset by 290 new listings in 2007.

 

The number of listed companies as of January 1, 2009, 2008 and 2007 includes separately listed ETFs. Annual renewal fees are recognized ratably over a 12-month period.

 

Listing of additional shares fees decreased in 2009 compared with 2008 as fewer companies issued additional shares in the second half of 2008 and the first half of 2009 compared to prior years. Listing of additional shares fees were flat in 2008 compared with 2007. Listing of additional shares fees are amortized on a straight-line basis over an estimated service period of four years.

 

Initial listing fees decreased in 2009 compared with 2008 and were flat in 2008 compared with 2007. The decrease in 2009 compared to 2008 was primarily due to a decrease in the number of new listings. There were 131 new listings, including 33 IPOs, during 2009 compared with 177 new listings, including 13 IPOs, during 2008 compared with 290 new listings, including 132 IPOs, during 2007. The decrease in new listings during 2009 will impact future revenues as these fees are amortized on a straight-line basis over an estimated service period of six years.

 

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European Listing Services Revenues

 

European Listing Services revenues decreased in 2009 compared with 2008, primarily due to a decline in the market capitalization of Nordic issuers as well as a decrease in the number of listed companies from 824 as of December 31, 2008 to 797 as of December 31, 2009. In addition, foreign exchange negatively impacted European Listing Services revenues by $4 million in 2009. Partially offsetting the decline in 2009 was an increase in revenues due to the inclusion of European Listing Services revenues for the full twelve-month period in 2009 compared to ten months in 2008. These revenues are recognized ratably over a 12-month period.

 

Corporate Services Revenues

 

Corporate Services revenues increased in 2009 compared with 2008 and in 2008 compared to 2007, primarily due to expanding customer utilization of Shareholder.com, revenues from Bloom Partners and our other corporate services. In addition, the inclusion of Corporate Services Nordic for the full twelve-month period in 2009 compared with ten months in 2008 contributed to the increase in 2009. Partially offsetting these increases in 2009 was a decrease in Carpenter Moore revenues primarily due to the sale of substantially all of our Carpenter Moore business in October 2009.

 

Global Index Group Revenues

 

Global Index Group revenues decreased in 2009 compared with 2008, primarily due to a decrease in underlying assets associated with NASDAQ OMX-licensed ETFs and a decrease in licensed derivatives and futures volumes, partially offset by futures price increases and the inclusion of a full twelve-month period of European global index revenues compared with ten months in 2008. Global Index Group revenues increased in 2008 compared with 2007 primarily due to an increase in licensing fees associated with NASDAQ OMX-licensed ETFs, licensed derivatives volumes and fees and third party structured products.

 

MARKET TECHNOLOGY

 

The following table shows the revenues from our Market Technology segment:

 

     Year Ended December 31,    Percentage
Change
 
         2009            2008        2009 vs. 2008  
     (in millions)       

Market Technology:

        

License, support and project revenues

   $ 110    $ 86    27.9

Facility management services

     30      29    3.4

Other revenues

     5      4    25.0
                    

Total Market Technology revenues

   $ 145    $ 119    21.8
                    

 

Market Technology revenues increased in 2009 compared with 2008, primarily due to the inclusion of Market Technology revenues for the full twelve-month period in 2009 compared to ten months in 2008. In addition, license support and project revenues increased primarily due to the increased deliveries of market technology contracts during 2009. Partially offsetting these increases was an unfavorable impact from foreign exchange of $14 million in 2009.

 

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Expenses

 

Operating Expenses

 

The following table shows our operating expenses:

 

     Year Ended December 31,    Percentage Change  
         2009            2008            2007        2009 vs. 2008     2008 vs. 2007  
     (in millions)             

Compensation and benefits

   $ 412    $ 401    $ 200    2.7   #   

Marketing and advertising

     15      19      21    (21.1 )%    (9.5 )% 

Depreciation and amortization

     104      93      39    11.8   #   

Professional and contract services

     76      72      32    5.6   #   

Computer operations and data communications

     58      54      29    7.4   86.2

Occupancy

     81      65      35    24.6   85.7

Regulatory

     32      29      29    10.3   —     

Merger expenses

     17      25      —      (32.0 )%    #   

General, administrative and other

     55      62      62    (11.3 )%    —     
                                 

Total operating expenses

   $ 850    $ 820    $ 447    3.7   83.4
                                 

 

# Denotes a variance equal to or greater than 100.0%.

 

Total operating expenses increased $30 million in 2009 compared with 2008 and $373 million in 2008 compared with 2007. The increase in 2009 reflects an increase in operating expenses of $63 million, partially offset by a favorable impact from foreign exchange of $33 million. The increase in operating expenses of $63 million in 2009 was primarily due to the inclusion of OMX’s operating expenses for the full twelve-month period in 2009 compared with ten months in 2008 and the inclusion of NASDAQ OMX PHLX’s operating expenses for the full twelve-month period in 2009 compared with five months in 2008. The increase in operating expenses in 2008 was primarily due to the business combination with OMX and the acquisition of PHLX. Expenses for OMX and NASDAQ OMX PHLX are included since the date of each acquisition. See below for further discussion.

 

Compensation and benefits expense increased in 2009 compared with 2008 and in 2008 compared with 2007. The increase in 2009 was primarily due to the inclusion of OMX’s compensation and benefits expense for the full twelve-month period in 2009 compared with ten months in 2008 as well as increased compensation and stock based compensation as a result of other recent acquisitions. Partially offsetting the increase in compensation and benefits expense in 2009 was a decrease in incentive compensation reflecting stronger financial performance in 2008, as well as a favorable impact from foreign exchange of $15 million. Headcount, including staff employed at consolidated entities where we have a controlling financial interest, decreased to 2,235 employees at December 31, 2009 from 2,506 employees at December 31, 2008 due to a reduction in staffing needs driven by successful integration efforts associated with our business combination with OMX AB and the acquisition of PHLX, as well as the sale of substantially all of our Carpenter Moore business and our Broker Services operations in the United Kingdom in the fourth quarter of 2009.

 

The increase in compensation and benefits expense in 2008 compared with 2007 was primarily due to the inclusion of compensation and benefits expense for OMX and NASDAQ OMX PHLX since the date of each acquisition, a curtailment gain of approximately $6 million recognized in 2007 as a result of the pension plan and supplemental executive retirement plan, or SERP, freeze and increased incentive compensation reflecting stronger financial performance. See Note 10, “Employee Benefits,” to the consolidated financial statements for further discussion of the curtailment gain. Headcount increased to 2,506 employees at December 31, 2008 from 887 employees at December 31, 2007, primarily due to our business combination with OMX AB.

 

Marketing and advertising expense decreased in 2009 compared with 2008 and in 2008 compared with 2007. The decrease in 2009 was primarily due to a reduction in media production and advertising. The decrease

 

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in 2008 was primarily due to reduced marketing activity, partially offset by the inclusion of OMX’s marketing and advertising expense since the date of the business combination in 2008.

 

Depreciation and amortization expense increased in 2009 compared with 2008 and in 2008 compared with 2007. The increase in 2009 was primarily due to the inclusion of NASDAQ OMX PHLX’s depreciation and amortization expense for the full twelve-month period in 2009 compared with five months in 2008 and the inclusion of OMX’s depreciation and amortization expense for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by a favorable impact from foreign exchange of $5 million. The increase in 2008 was primarily due to additional amortization expense for intangible assets acquired in our business combination with OMX AB, as well as the inclusion of depreciation and amortization expense for OMX and NASDAQ OMX PHLX since the date of each acquisition.

 

Professional and contract services expense increased in 2009 compared with 2008 and in 2008 compared with 2007. The increase in 2009 was primarily due to expenses for consulting work performed on system upgrades, as well as the inclusion of NASDAQ OMX PHLX’s professional and contract services expense for the full twelve-month period in 2009 compared with five months in 2008. Partially offsetting these increases was foreign exchange, which had a favorable impact of $3 million in 2009, and lower costs due to cost savings programs that were put in place during 2009. The increase in 2008 was primarily due to the inclusion of OMX’s professional and contract services expense since the date of the business combination in 2008.

 

Computer operations and data communications expense increased in 2009 compared with 2008 and in 2008 compared with 2007. The increase in 2009 was primarily due to an increase in hardware maintenance, software leases and network costs to facilitate our recent acquisitions, as well as the inclusion of OMX’s computer operations and data communications expense for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by a favorable impact from foreign exchange of $2 million. The increase in 2008 was primarily due to the inclusion of computer operations and data communication expense for OMX and NASDAQ OMX PHLX since the date of each acquisition, partially offset by lower costs due to hardware and software leases that were cancelled in the fourth quarter of 2007.

 

Occupancy expense increased in 2009 compared with 2008 and in 2008 compared with 2007. The increase in 2009 was primarily due to a charge incurred as a result of our decision to exercise our option to terminate our lease contract for space we occupy in Stockholm, Sweden before its term and our decision to vacate part of the space we occupy in Stockholm, which resulted in recording an estimated sublease loss reserve of $8 million. In addition, an increase in co-location rent and the inclusion of NASDAQ OMX PHLX’s occupancy expense for the full twelve-month period in 2009 compared with five months in 2008 contributed to the increase. Partially offsetting this increase was foreign exchange, which had a favorable impact of $2 million for 2009. The increase in 2008 was primarily due to the inclusion of occupancy expense for OMX and NASDAQ OMX PHLX since the date of each acquisition.

 

Regulatory expense increased in 2009 compared with 2008 and was flat in 2008 compared with 2007. The increase in 2009 was primarily due to new regulatory fees from FINRA and an expansion of regulatory services to new markets. FINRA provides regulatory services to The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX and the markets operated and regulated by NASDAQ OMX BX, including the regulation of trading activity and surveillance and investigative functions.

 

Merger expenses were $17 million for 2009 compared with $25 million in 2008. Merger expenses for 2009 and 2008 were directly attributable to the business combination with OMX AB and the acquisition of PHLX, but did not qualify as purchase accounting adjustments. The costs primarily included consulting and legal costs related to our integration of OMX AB and PHLX. Merger expenses in 2009 also included the expected resolution of sales and use tax exposures that existed on previous acquisitions.

 

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General, administrative and other expense decreased in 2009 compared with 2008 and was flat in 2008 compared with 2007. The decrease in 2009 was primarily due to foreign exchange which had a favorable impact of $6 million, the recognition of pre-tax gains of $4 million on the early extinguishment of debt, net of debt issuance and other costs, and an improvement in collections of bad debts in 2009, partially offset by asset retirements of $10 million in 2009 related to obsolete technology assets. See “Early Extinguishment of Debt,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of the early extinguishment of debt.

 

General, administrative and other expense remained flat in 2008 compared with 2007 due to the inclusion of OMX’s and PHLX’s general, administrative and other expense since the date of each acquisition in 2008, offset by charges recorded in 2007 including a $20 million tax sharing payment owed to Silver Lake Partners, or SLP, pursuant to an agreement to share the deferred tax benefit on the sale of Instinet’s Institutional Brokerage division. In addition, we recorded a $6 million loss in 2007 on the early extinguishment of debt related to the repayment in full of our former credit facilities with the proceeds from the sale of the share capital of LSE. Also, in 2007 there was an additional loss of $1 million on the early extinguishment of a portion of the 3.75% convertible notes and an $11 million charge related to cancelling a clearing contract. Our single trading platform includes functionality that enabled us to discontinue the use of services previously provided under the clearing contract.

 

Non-operating Income and Expenses

 

The following table presents our non-operating income and expenses:

 

     Year Ended December 31,     Percentage Change  
         2009             2008             2007         2009 vs. 2008     2008 vs. 2007  
     (in millions)              

Interest income

   $ 13      $ 35      $ 38      (62.9 )%    (7.9 )% 

Interest expense

     (102     (97     (73   5.2   32.9
                                    

Net interest expense

     (89     (62     (35   43.5   77.1

Dividend and investment income

     2        8        15      (75.0 )%    (46.7 )% 

Loss on sale of investment security

     (5     —          —        #      —     

Gain on sales of businesses

     12        —          —        #      —     

Income (loss) from unconsolidated investees, net

     (107     27        —        #      #   

Debt conversion expense

     (25     —          —        #      —     

Asset impairment charges

     —          (42     —        #      #   

Gain (loss) on foreign currency contracts, net

     —          (58     44      #      #   

Gain on sale of strategic initiative

     —          —          431      #      #   

Strategic initiative costs

     —          —          (26   #      #   
                                    

Total non-operating income and (expenses)

   $ (212   $ (127   $ 429      66.9   #   
                                    

 

# Denotes a variance equal to or greater than 100.0%.

 

Interest Income

 

Interest income decreased in 2009 compared with 2008 and in 2008 compared with 2007. The decrease in 2009 was primarily due to lower interest rates of approximately 2% on our investments in 2009 compared with 2008. The decrease in 2008 was primarily due to lower interest rates and the use of cash to fund acquisitions in 2008, partially offset by the inclusion of OMX’s interest income since the date of the business combination in 2008.

 

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Interest Expense

 

Total interest expense for 2009 was $102 million, and was comprised of $67 million in interest expense, $13 million of non-cash expense associated with accretion of the 2.50% convertible notes, $11 million in non-cash debt issuance amortization expense and $11 million in other related fees. Interest expense increased in 2009 compared with 2008 primarily due to a full twelve-month period of interest expense in 2009 on our outstanding debt obligations related to the OMX AB business combination compared with ten months of interest expense in 2008 and additional interest expense due to our increased outstanding debt obligations as a result of the acquisitions of PHLX and certain businesses of Nord Pool that were completed in the second half of 2008.

 

Interest expense increased in 2008 compared with 2007 primarily due to an increase in debt issuance amortization costs due to the draw-down of debt to fund our acquisitions compared to minimal debt issuance costs in 2007 due to the costs being included in general, administrative and other expenses as a result of the early extinguishment of debt related to the repayment in full of our outstanding debt obligations in September 2007 with the proceeds of the sale of our share capital of LSE. In addition, interest expense increased in 2008 due to a higher average outstanding debt balance, due to the draw-down of debt to fund our acquisitions, partially offset by lower interest rates.

 

Dividend and Investment Income

 

Dividend and investment income decreased in 2009 compared with 2008 and in 2008 compared with 2007. The decrease in 2009 was primarily due to a decrease in the dividend per share received from our available-for-sale investment in the Oslo Børs Exchange, or Oslo, as well as a decrease in the fair value of our government debt securities portfolio classified as trading investment securities. Lower fair values were generally related to higher interest rates in 2009 on this portfolio. The decrease in 2008 is primarily due to the absence of the ordinary dividends declared from our investment in LSE that was sold in 2007, partially offset by the dividend per share received in 2008 from our available-for-sale investment in Oslo.

 

Loss on Sale of Investment Security

 

In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment in Oslo. During the second quarter of 2009, we made a strategic decision to sell this investment, demonstrating our intent to no longer hold this investment, and recorded a $5 million loss, which is net of costs directly related to the sale, primarily broker fees.

 

In 2008, we recorded a non-cash other-than-temporary impairment charge of $35 million related to this investment, which was included in asset impairment charges in the Consolidated Statements of Income. See “Asset Impairment Charges” below for further discussion.

 

Gain on Sales of Businesses

 

In October 2009, we entered into agreements to sell substantially all of our Carpenter Moore business. On October 2, 2009, we agreed to sell certain assets of the western region direct practice insurance brokerage business to Woodruff-Sawyer & Co. and, on October 26, 2009, we agreed to sell the eastern region insurance brokerage business to Aon Risk Services Companies, Inc. In connection with these sales, we recorded a gain of $7 million.

 

In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million.

 

Income (Loss) from Unconsolidated Investees, net

 

The net loss in 2009 of $107 million was primarily due to impairment charges related to our investments in NASDAQ Dubai and Agora-X and the sale of our Orc shares. See below for further discussion. The net income in 2008 of $27 million primarily related to the NASDAQ Dubai transaction in February 2008. We contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33  1 / 3 % equity stake in NASDAQ

 

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Dubai. One of the intangible assets contributed was the Nasdaq trade name, which had a zero carrying value on Nasdaq’s books and records prior to the transfer. As a result, we recognized a $26 million gain for the difference between Nasdaq’s carrying value and the fair value of the contributed asset on this non-monetary exchange.

 

Impairment of NASDAQ Dubai

 

In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. As part of this realignment, NASDAQ Dubai will become a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We will receive a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai will remain unchanged. The realignment is expected to be completed during the first half of 2010 and, at that time, we may record a gain or a loss based on the then-current market price of DFM shares and the then-current carrying value of our investment in NASDAQ Dubai.

 

In connection with the realignment of the ownership structure discussed above, a third-party specialist determined the fair value of NASDAQ Dubai. Based on this valuation, we determined our carrying value of NASDAQ Dubai was no longer recoverable and was in fact impaired, and wrote down our investment to fair value which resulted in an $82 million pre-tax, non-cash impairment charge.

 

NASDAQ OMX originally contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33  1 / 3 % equity stake in NASDAQ Dubai in February 2008. At that time, NASDAQ OMX valued its total NASDAQ Dubai investment at $128 million. Prior to the impairment, the investment had a carrying value of $120 million.

 

Impairment of Agora-X

 

In December 2009, we also recorded a pre-tax, non-cash impairment charge of $5 million to write down our investment in Agora-X to its estimated fair value. In December 2009, we entered into an agreement to increase our investment in Agora-X from 20% to 85%. In evaluating the fair value of the total investment, it was determined that our carrying value of Agora-X was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in the $5 million impairment charge noted above.

 

Sale of Orc Shares

 

During the second quarter of 2009, we sold our shares in Orc, representing 25.25% of the share capital of Orc, to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which is net of costs directly related to the sale, primarily broker fees.

 

Debt Conversion Expense

 

In the third quarter of 2009, we recorded debt conversion expense of $25 million related to an inducement for conversion of most of the 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the present value of the series A convertible preferred stock issued of $15 million, and debt issuance and other costs of $1 million. See “Conversion of 3.75% Convertible Notes,” of Note 8, “Debt Obligations,” and “Preferred Stock,” of Note 12, “Stockholders’ Equity,” to the consolidated financial statements for further discussion.

 

Asset Impairment Charges

 

In 2008, we recorded a non-cash other-than-temporary impairment charge of $35 million related to a long-term available-for-sale investment security. See “Financial Investments,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion. We also recorded a

 

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non-cash impairment loss of $7 million in 2008 from the write-down of finite-lived intangibles assets, primarily related to our insurance agency business. See Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion.

 

Gain (Loss) on Foreign Currency Contracts, net

 

The loss on foreign currency contracts was $58 million in 2008 compared with a gain of $44 million in 2007. The loss in 2008 primarily relates to a forward contract entered into to hedge the NOK cash payment for the Nord Pool transaction ($72 million) and our market technology forward currency contracts ($13 million), partially offset by gains on forward contracts entered into to hedge the foreign currency exposure on our business combination with OMX AB ($27 million).

 

The gain in 2007 primarily relates to option contracts purchased to hedge the foreign currency exposure on our business combination with OMX AB ($52 million), partially offset by a loss on options contracts purchased to hedge the foreign currency exposure on our acquisition bid for LSE ($8 million).

 

See Note 15, “Derivative Financial Instruments and Hedging Activities,” to the consolidated financial statements for further discussion.

 

Gain on Sale of Strategic Initiative

 

The pre-tax gain on the sale of a strategic initiative was $431 million in 2007. The gain represents the sale of our share capital of LSE and is net of costs directly related to the sale of $18 million, primarily broker fees.

 

Strategic Initiative Costs

 

Strategic initiative costs were $26 million in 2007. We incurred these costs in connection with our strategic initiative related to LSE, including our acquisition bid. In conjunction with the lapse of our final offers for LSE in February 2007, these costs were charged to expense.

 

Income Taxes

 

NASDAQ OMX’s income tax provision was $128 million in 2009 compared with $198 million in 2008, and $276 million in 2007. The overall effective tax rate was 32.7% in 2009, 38.6% in 2008 and 34.8% in 2007. The lower effective tax rate in 2009 is primarily due to reductions in valuation allowances associated with certain deferred tax assets, and reductions in current year taxes in jurisdictions outside the U.S. Offsetting these decreases is the debt conversion expense, which is not deductible for U.S. tax purposes. The higher effective tax rate in 2008 when compared to 2007 was primarily due to the other-than-temporary impairment loss of $35 million on a long-term available-for-sale investment security, which is not deductible for tax purposes.

 

The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses. These same and other factors, including history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets.

 

We adopted ASC Topic 470.20, “Debt: Debt with Conversion and Other Options,” on January 1, 2009 and have adjusted all periods presented to reflect the tax impact on the incremental interest expense, which resulted in a change in tax expense and current and non-current deferred tax liabilities. See “ASC Topic 470.20,” of Note 2, “Summary of Significant Accounting Policies” and “Adoption of ASC 470.20,” of “2.50% Convertible Senior Notes,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion.

 

In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or

 

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litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.

 

NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return, applicable state and local income tax returns, and non-U.S. income tax returns. Federal income tax returns for years 2006-2008 are subject to examination by the Internal Revenue Service. Several state tax returns are currently under examination by the respective tax authorities for years 1996-1998 and 2000-2006 and we are subject to examination for 2007 and 2008. Non-U.S. tax returns are subject to review by the respective tax authorities for years 2002-2008. We anticipate that the amount of unrecognized tax benefits at December 31, 2009 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments would not have a material impact on our consolidated financial position or results of operations.

 

In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advanced Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. We expect to receive a favorable response from the Swedish Tax Council for Advance Tax Rulings. We recorded the Swedish tax benefit as described above in our consolidated financial statements. In 2009 we recorded a tax benefit of $19 million, or $.09 per diluted share. We expect to record recurring quarterly tax benefits of $4 million to $5 million with respect to this issue for the foreseeable future.

 

Net (Income) Loss Attributable to Noncontrolling Interests

 

Net loss attributable to noncontrolling interests was $3 million in 2009, compared to net income of $1 million in 2008 and was immaterial for 2007. The 2009 amount primarily reflects losses attributable to noncontrolling interests in IDCG. The 2008 noncontrolling interests amount primarily represents 1.2% of OMX income for the period February 27, 2008 to August 27, 2008 (the effective date of the purchase of the remaining minority OMX AB shares). The 2007 noncontrolling interests relate to Reuters’ investment in the Independent Research Network, a joint venture created to help public companies obtain independent analyst coverage. This investment was reduced to zero due to losses incurred at the Independent Research Network, and all losses of the Independent Research Network were recorded by us. We have discontinued the Independent Research Network’s operations.

 

Liquidity and Capital Resources

 

Global market and economic conditions appear to have rebounded from adverse levels experienced earlier in 2009, and this recovery has reinvigorated financial markets. Many lenders and institutional investors have reestablished their lending practices and are now able to provide increased funding to borrowers, which has resulted in improved access to credit and positive liquidity growth. Our cost and availability of funding remain healthy and we expect to be positively impacted by continued improvements in the credit markets.

 

As a result of the improvements in the credit markets, on January 15, 2010, NASDAQ OMX refinanced its existing credit facilities by issuing $1 billion of senior unsecured notes, or the Notes, and entering into a $950 million senior unsecured three-year credit facility. The new credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Tranche A term loan, or the Term Loan A, and a $350 million funded Tranche X term loan, or the Term Loan X and, together with the Term Loan A, the Term Loans. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. See “Issuance of Notes, New Credit Facility, and Repayment of Existing Credit Facility,” of Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion.

 

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We require cash to pay our operating expenses, make capital expenditures and service our debt and other long-term liabilities. Our principal source of funds is cash from our operations. We also have a $250 million revolving credit commitment under our January 2010 credit facility to borrow funds. In addition, we have obtained funds by selling our common stock in the capital markets and by issuing debt obligations. In order to finance our business combination with OMX AB, our acquisition of PHLX and the Nord Pool transaction, we incurred additional debt and issued shares of our common stock. See Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of our debt obligations.

 

In the near term, we expect that our operations will provide sufficient cash to fund our operating expenses, capital expenditures and interest payments on our debt. As of December 31, 2009, our cash and cash equivalents of $594 million were primarily invested in money market funds. In the long-term, we may use both internally generated funds and external sources to satisfy our debt and other long-term liabilities.

 

Principal factors that could affect the availability of our internally-generated funds include:

 

   

deterioration of our revenues in any of our business segments;

 

   

changes in our working capital requirements; and

 

   

an increase in our expenses.

 

Principal factors that could affect our ability to obtain cash from external sources include:

 

   

operating covenants contained in our January 2010 credit facility that limit our total borrowing capacity;

 

   

increases in interest rates applicable to our floating rate loans under the January 2010 credit facility;

 

   

credit rating downgrades, which could limit our access to additional debt;

 

   

a decrease in the market price of our common stock; and

 

   

volatility in the public debt and equity markets.

 

The following sections discuss the effects of changes in our cash flows, capital requirements and other commitments on our liquidity and capital resources.

 

Cash and Cash Equivalents and Changes in Cash Flows

 

Cash and cash equivalents include cash in banks and all non-restricted highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash, which was $60 million as of December 31, 2009 and $141 million as of December 31, 2008, is not available for general use by us due to regulatory and other requirements and is classified as restricted cash in the Consolidated Balance Sheets. Non-current restricted cash, which was $50 million at both December 31, 2009 and 2008, relates to a deposit in the guaranty fund of IDCG and is classified as non-current restricted cash in the Consolidated Balance Sheets.

 

The following tables summarize our cash and cash equivalents and changes in cash flows:

 

     December 31,
2009
   December 31,
2008
   Percentage
Change
 
     (in millions)       

Cash and cash equivalents (1)

   $ 594    $ 374    58.8

 

(1)

Cash and cash equivalents exclude restricted cash which is not available for general use by us due to regulatory and other requirements.

 

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     Year Ended December 31,     Percentage Change  
           2009                 2008          
     (in millions)        

Cash provided by operating activities

   $ 582      $ 216      #   

Cash used in investing activities

     (53     (3,149   (98.3 )% 

Cash provided by (used in) financing activities

     (336     2,029      #   

Effect of exchange rate changes on cash and cash equivalents

     27        (47   #   

 

# Denotes a variance equal to or greater than 100.0%.

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased $220 million from December 31, 2008 primarily due to positive cash flows from operating activities, partially offset by payments of outstanding debt obligations.

 

Changes in Cash Flows

 

Cash Provided by Operating Activities

 

The following items impacted our cash provided by operating activities for the year ended December 31, 2009:

 

   

Net income attributable to NASDAQ OMX of $266 million, plus:

 

   

Non-cash items of $268 million comprised primarily of loss from unconsolidated investees, net of $107 million, depreciation and amortization of $104 million, share-based compensation of $35 million, debt conversion expense of $25 million, accretion of 2.50% convertible senior notes of $13 million and asset retirements and impairment charges of $13 million, partially offset by gain on sales of businesses of $12 million and deferred taxes, net of $10 million.

 

   

Decrease in other assets of $130 million primarily due to a decrease in restricted cash as a result of the release of NASDAQ OMX Commodities clearing capital due to changes in our clearing capital model.

 

   

Increase in Section 31 fees payable to SEC of $88 million due to higher Section 31 fees as a result of rate increases.

 

   

Decrease in receivables, net of $33 million primarily due to decreases in our transaction services trade receivables reflecting increased tape rebates, which are netted against our tape revenue billings.

 

   

Partially offset by a:

 

   

Decrease in accounts payable and accrued expenses of $125 million primarily due to lower rebates as a result of decreased trading activity, as well as the wind-down of activities at Carpenter Moore and our Broker Services operations in the United Kingdom, which were sold in the fourth quarter of 2009.

 

   

Decrease in accrued personnel costs of $41 million primarily due to a decrease in our incentive compensation accrual reflecting stronger financial performance in 2008, as well as a reduction in the number of employees in 2009.

 

   

Decrease in other accrued liabilities of $37 million primarily due to decreases in accrued taxes as a result of payments made.

 

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The following items impacted our cash provided by operating activities for the year ended December 31, 2008:

 

   

Net income attributable to NASDAQ OMX of $314 million, plus:

 

   

Non-cash items of $98 million comprised primarily of depreciation and amortization expense of $93 million, loss on foreign currency contracts, net of $58 million, asset impairment charges of $42 million and share-based compensation of $26 million, partially offset by deferred taxes, net of $107 million and income from unconsolidated investees, net of $27 million.

 

   

Decrease in receivables, net of $31 million primarily due to lower Section 31 fees as a result of rate decreases.

 

   

Increase in accrued personnel costs of $21 million primarily due to additional incentive compensation reflecting stronger financial performance.

 

   

Increase in accounts payable and accrued expenses of $20 million primarily due to additional liquidity rebates from increased trade volume.

 

   

Increase in other liabilities of $18 million primarily due to additional liabilities for the NASDAQ OMX PHLX benefit plans.

 

   

Partially offset by a:

 

   

Increase in other assets of $181 million primarily due to the increase in the restricted cash balance as of December 31, 2008 due to regulatory and other requirements as a result of our transaction with Nord Pool and acquisition of IDCG.

 

   

Decrease in Section 31 fees payable to SEC of $54 million mainly due to lower Section 31 fees as a result of rate decreases.

 

   

Decrease in deferred revenue of $42 million primarily due to a decrease in the initial listing fees deferred revenue balance as a result of a decrease in new listings during 2008, as well as the amortization of OMX’s annual listing fees.

 

   

Decrease in other accrued liabilities of $9 million primarily due to a decrease in income tax payable as a result of paying the 2007 tax liability related to the sale of our share capital in LSE.

 

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, accounts receivable collections, share-based compensation and the timing and amount of other payments that we make.

 

Cash Used in Investing Activities

 

Cash used in investing activities for the year ended December 31, 2009 is primarily due to cash used in connection with the purchase of trading securities, as well as purchases of property and equipment. Partially offsetting cash used was cash received from sales and redemptions of trading securities and our available-for-sale investment in Oslo, as well as cash received from the sale of our 25.25% equity method investment in Orc. In 2008, cash used in investing activities primarily related to our business combination with OMX AB, acquisitions of PHLX, BSX and certain businesses of Nord Pool, our purchase of a majority stake in IDCG and other acquisitions, net of cash acquired, as well as the acquisition of a 33  1 / 3 % equity stake in NASDAQ Dubai and the equity stake in Agora-X, for total cash paid of $2,999 million.

 

Cash Provided by (Used in) Financing Activities

 

Cash used in financing activities for 2009 consisted of $225 million in principal payments made on our Term Loan Facility (defined below under Credit Facilities) and a $71 million payment to repay in full the vendor note issued to the previous owners of Nord Pool in connection with the acquisition of certain businesses of Nord

 

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Pool. In addition, we repurchased $47 million principal amount of our 2.50% convertible senior notes for a cash payment of $40 million and recognized a pre-tax gain of $4 million, net of debt issuance and other costs, and made a $4 million payment on our other credit facilities in 2009. We also made a $9 million payment in connection with an inducement for the conversion of our 3.75% convertible notes. For further discussion of the $9 million inducement payment, see Note 8, “Debt Obligations,” and “Preferred Stock,” of Note 12, “Stockholders’ Equity,” to the consolidated financial statements. In 2008, cash provided by financing activities consisted of the proceeds from the issuance of $475 million aggregate principal amount of 2.50% convertible senior notes and $2,000 million in senior secured indebtedness under our Credit Facilities. See “Credit Facilities” below for further discussion. The 2008 proceeds from the 2.50% convertible senior notes and Credit Facilities were partially offset by the refinancing of $353 million of OMX AB outstanding debt obligations at the time of the business combination. In addition, we made a $75 million principal payment in 2008 on our Term Loan Facility.

 

Capital Resources and Working Capital

 

Working capital (calculated as current assets less current liabilities) was $587 million at December 31, 2009, compared with $351 million at December 31, 2008, an increase of $236 million, or 67.2%. We have historically been able to generate sufficient funds from operations to meet working capital requirements. At December 31, 2009, we had total contractual debt obligations of $2,146 million, of which $225 million is due within one year. See below for further discussion.

 

3.75% Convertible Notes due 2012

 

In 2009, most of the holders of our outstanding 3.75% convertible notes agreed to convert their remaining outstanding notes into common stock in accordance with the terms of the notes, which resulted in the issuance of an aggregate of 8,246,680 shares of our common stock. See “Conversion of 3.75% Convertible Notes,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion.

 

2.50% Convertible Senior Notes due 2013

 

In the first quarter of 2008, in connection with the business combination with OMX AB, we completed the offering of $475 million aggregate principal amount of 2.50% convertible senior notes due 2013. In 2009, we repurchased $47 million principal amount of the notes for a cash payment of $40 million and recognized a pre-tax gain on the early extinguishment of debt of $4 million, net of debt issuance and other costs of $0.8 million. These gains were recorded in general, administrative and other expense in the Consolidated Statements of Income. The aggregate principal amount outstanding on these notes as of December 31, 2008 was $475 million. As a result of the repurchase, the remaining aggregate principal amount outstanding on these notes as of December 31, 2009 was $428 million. It is our intent and policy to settle the principal amount of the notes in cash and we are permitted to settle the conversion premium in shares of our common stock or cash.

 

Credit Facilities

 

In connection with the business combination with OMX AB, on February 27, 2008, NASDAQ OMX entered into a credit agreement which provided for up to $2,075 million of senior secured loans, which included (i) a five-year, $2,000 million senior secured term loan facility, or the Term Loan Facility, which consisted of (a) a $1,050 million term loan facility allocated to the OMX AB business combination; (b) a $650 million term loan facility allocated to the acquisition of PHLX, and (c) a $300 million term loan facility allocated to the Nord Pool transaction, and (ii) a five-year, $75 million senior secured revolving credit facility, with a letter of credit subfacility and swingline loan subfacility, or the Revolving Credit Facility, and together with the Term Loan Facility, the Credit Facilities. The Revolving Credit Facility was undrawn as of December 31, 2009 and 2008. Total debt obligations outstanding under the Credit Facilities were $1,700 million at December 31, 2009 and $1,925 million at December 31, 2008.

 

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Under the provisions of our Credit Facilities, we were required to maintain approximately 30% of our debt structure on a fixed rate basis for two years from the date of the credit agreement. As such, in August 2008, we entered into interest rate swap agreements that effectively converted $200 million of funds borrowed under our Credit Facilities, which was floating rate debt, to a fixed rate basis through August 2011. The interest rate swap was fixed to a base rate of 3.73% plus the current credit spread of 200 basis points as of December 31, 2009. The credit spread (not to exceed 200 basis points) was subject to change based upon the leverage ratio in accordance with the Credit Facilities. In connection with the repayment of our Credit Facilities in January 2010, we terminated these float-to-fixed interest rate swaps. See “Interest Rate Swaps,” of Note 8, “Debt Obligations,” “Cash Flow Hedges,” of Note 15, “Derivative Financial Instruments and Hedging Activities,” and “Issuance of Notes, New Credit Facility, and Repayment of Existing Credit Facility,” of Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion.

 

As stated above, on January 15, 2010, NASDAQ OMX issued $1 billion of senior Notes and entered into a $950 million senior unsecured three-year credit facility which provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), and $700 million of funded Term Loans. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our Credit Facilities and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. See “Issuance of Notes, New Credit Facility, and Repayment of Existing Credit Facility,” of Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion.

 

We have other credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $417 million ($185 million which is available to be pledged as collateral and $232 million to satisfy regulatory requirements), none of which was drawn at December 31, 2009.

 

At December 31, 2008, these credit facilities totaled $246 million, of which $4 million was drawn. Amounts drawn are included in other accrued liabilities in the Consolidated Balance Sheets.

 

At December 31, 2009, we were in compliance with the covenants of all of our debt obligations.

 

NASDAQ OMX’s corporate debt was recently upgraded by S&P in January 2010 (BBB) and Moody’s in November 2009 (Baa3).

 

See Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of our 3.75% convertible notes, 2.50% convertible senior notes and Credit Facilities.

 

Broker-Dealer Net Capital Requirements

 

Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, are subject to regulatory requirements intended to ensure their general financial soundness and liquidity, which require that they comply with minimum capital requirements. At December 31, 2009, Nasdaq Execution Services was required to maintain minimum net capital of $0.3 million and had total net capital of approximately $8.9 million, or $8.6 million in excess of the minimum amount required. At December 31, 2009, NASDAQ Options Services was also required to maintain minimum net capital of $0.3 million and had total net capital of approximately $4.5 million, or $4.2 million in excess of the minimum amount required.

 

Other Capital Requirements

 

NASDAQ Options Services is also required to maintain a $2.0 million minimum level of net capital under our clearing arrangement with the OCC.

 

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Derivative Clearing Operations Regulatory Capital Requirements

 

We are required to maintain minimum levels of regulatory capital for our clearing operations for NASDAQ OMX Stockholm, NASDAQ OMX Commodities and IDCG. The level of regulatory capital required to be maintained is dependent upon many factors, including market conditions and creditworthiness of the counterparty. At December 31, 2009, we were required to maintain regulatory capital of $263 million which is comprised of:

 

   

$30 million of restricted cash;

 

   

$50 million of non-current restricted cash; and

 

   

$183 million primarily in Swedish government debt securities. These securities are included in financial investments, at fair value in the Consolidated Balance Sheets as of December 31, 2009.

 

In addition, we have available credit facilities of $232 million which can be utilized to satisfy our regulatory capital requirements.

 

OMX AB Share Purchase

 

On August 27, 2008, through compulsory acquisition procedures under Swedish law, NASDAQ OMX received advanced title for the remaining 1.2% of OMX AB shares held by OMX AB shareholders for an aggregate consideration of SEK 370.8 million ($61.7 million at August 27, 2008). As a result of the compulsory acquisition procedures, OMX AB is now wholly-owned by NASDAQ OMX. The additional purchase price for the shares acquired was included in other liabilities in the Consolidated Balance Sheets as of December 31, 2008. In accordance with the compulsory acquisition procedures, NASDAQ OMX was required to maintain cash amounts greater than the total amount due, and as such, segregated SEK 440 million ($73.2 million as of August 27, 2008) in other assets in the Consolidated Balance Sheets as of December 31, 2008. In February 2009, NASDAQ OMX paid the full liability of SEK 370.8 million ($41 million at February 28, 2009) plus interest to holders of the remaining 1.2% of OMX AB shares.

 

Contractual Obligations and Contingent Commitments

 

NASDAQ OMX has contractual obligations to make future payments under debt obligations by contract maturity, minimum rental commitments under non-cancelable operating leases, net and other obligations. The following table shows these contractual obligations as of December 31, 2009:

 

     Payments Due by Period

Contractual Obligations

   Total    Less than
1 year
   1-3
years
   3-5
years
   More
than
5 years
     (in millions)

Debt obligations by contract maturity (See Note 8, “Debt Obligations”) (1)

   $ 2,286    $ 280    $ 1,381    $ 605    $ 20

Minimum rental commitments under non-cancelable operating leases, net (See Note 16, “Leases”)

     586      105      129      120      232

Other obligations

     14      7      7      —        —  
                                  

Total

   $ 2,886    $ 392    $ 1,517    $ 725    $ 252
                                  

 

(1)

Our debt obligations include both principal and interest obligations. The interest on our Credit Facilities reflects the net interest payment after consideration of interest rate swap agreements that effectively converted $200 million of our Credit Facility to fixed rate debt. See Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion. A weighted-average interest rate of 2.64% at December 31, 2009 was used to compute the amount of the contractual obligations for interest on our Credit Facilities. The 2.50% convertible senior notes contractual obligation for interest was calculated on a 360 day basis at the contractual fixed rate of 2.50% multiplied by the aggregate principal amount of $428 million at December 31, 2009. As noted above, all amounts outstanding under our Credit Facilities were repaid in January 2010.

 

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As a result of the repayment of our Credit Facilities and the issuance of our new Notes and Term Loans, our debt obligations by contract maturity will be as follows: Total, $2,645 million; less than 1 year, $146 million; 1-3 years, $425 million; 3-5 years, $889 million; and more than 5 years, $1,185 million. The interest on the Notes was calculated on a 360-day basis at the contractual fixed rates multiplied by the aggregate principal amounts. A rate of 2.23% was utilized to compute the interest on the Term Loans.

 

Off-Balance Sheet Arrangements

 

Brokerage Activities

 

Nasdaq Execution Services and NASDAQ Options Services provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to the clearinghouses, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral as well as meet certain minimum financial standards. Nasdaq Execution Services’ and NASDAQ Options Services’ maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements.

 

Guarantees Issued, Credit Facilities Available and Collateral Received for Clearing Operations

 

Through our clearing operations in the derivative markets of NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We are required to pledge collateral for commitments with other clearinghouses. The amount of these commitments is calculated on the gross exposure between the clearinghouses. As collateral for these obligations, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities. At December 31, 2009, financial guarantees pledged as collateral totaled $4 million. Credit facilities available to be pledged as collateral totaled $185 million, none of which was utilized as of December 31, 2009.

 

In addition, we obtained credit facilities to satisfy regulatory requirements totaling $232 million, none of which has been utilized as of December 31, 2009.

 

At December 31, 2008, these credit facilities totaled $246 million, of which $4 million was drawn. Amounts drawn are included in other accrued liabilities in the Consolidated Balance Sheets.

 

We require our customers to pledge collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $6.1 billion at December 31, 2009 and $5.4 billion at December 31, 2008. This pledged collateral is held by a custodian bank. Since these funds are not held by NASDAQ OMX Commodities and NASDAQ OMX Stockholm and they are not available for our use, we do not receive any interest income on these funds. Customer pledged cash collateral held by IDCG was $3 million at December 31, 2009 and is included in restricted cash with an offsetting liability included in other accrued liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest, belongs to IDCG.

 

We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements.

 

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Other Guarantees

 

We have provided other guarantees as of December 31, 2009 of $30 million, primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have performance guarantees of $5 million related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support these guarantees. These guarantees totaled $31 million at December 31, 2008.

 

Quantitative and Qualitative Disclosures About Market Risk

 

As a result of our operating and financing activities, we are exposed to market risks such as interest rate risk, foreign currency exchange rate risk, equity risk and credit risk.

 

We have implemented policies and procedures to measure, manage, monitor and report risk exposures, which are reviewed regularly by management and the board of directors. We identify risk exposures and monitor and manage such risks on a daily basis.

 

We perform sensitivity analyses to determine the effects that market risk exposures may have. We may use derivative instruments solely to hedge financial risks related to our financial positions or risks that are incurred during the normal course of business. We do not use derivative instruments for speculative purposes.

 

Interest Rate Risk

 

The majority of our financial assets and liabilities are based on floating rates and fixed rates with an outstanding maturity or reset date falling in less than one year. The following table summarizes our significant exposure to interest rate risk as of December 31, 2009:

 

     Financial
Assets
   Financial
Liabilities (2)
   Negative impact of a
100 bp adverse shift
in interest rate (3)
     (in millions)

Floating rate positions (1)

   $ 787    $ 1,500    $ 15

Fixed rate positions ( 4 )( 5 )

     233      646      4
                    

Total

   $ 1,020    $ 2,146    $ 19
                    

 

(1)

Includes floating rate and fixed interest rates with a maturity or reset date due within 12 months.

(2)

Represents total contractual debt obligations.

(3)

Annualized impact of a 100 basis point parallel adverse shift in the yield curve.

(4)

Financial assets primarily consist of our Swedish government debt securities, which are classified as trading investment securities, with an average duration of 2.67 years. See Note 14, “Fair Value of Financial Instruments,” to the consolidated financial statements for further discussion.

(5)

Financial liabilities include $200 million of our Credit Facilities which were swapped to fixed rate using float-to-fixed interest rate swaps in the third quarter of 2008. In connection with the repayment of our Credit Facilities in January 2010, we terminated these float-to-fixed interest rate swaps. See “Interest Rate Swaps,” of Note 8, “Debt Obligations,” “Cash Flow Hedges,” of Note 15, “Derivative Financial Instruments and Hedging Activities,” and “Issuance of Notes, New Credit Facility, and Repayment of Existing Credit Facility,” of Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion.

 

We are exposed to cash flow risk on floating rate positions. When interest rates on financial assets of floating rate positions decrease, net interest income decreases. When interest rates on financial liabilities of floating rate positions increase, net interest expense increases. Based on December 31, 2009 positions, each 1.0% change in interest rates on our net floating rate positions would impact annual pre-tax income negatively by $15 million in total as reflected in the table above.

 

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We are exposed to price risk on our fixed rate financial investments, which total $233 million at December 31, 2009. At December 31, 2009, these fixed rate positions have an average outstanding maturity or reset date falling in more than one year. A shift of 1.0% of the interest rate curve would in aggregate impact the fair value of these positions by approximately $6 million. The average duration of the portfolio was 2.67 years. The net effect of such a yield curve shift, taking into account the change in fair value and the increase in interest income, would impact annual pre-tax income negatively by $4 million.

 

The aggregate impact of a 100 basis point adverse shift in interest rates on our fixed and floating rate positions as of December 31, 2008 would have been $16 million.

 

Foreign Currency Exchange Rate Risk

 

As an international company, we are subject to currency translation risk. For the year ended December 31, 2009, approximately 34.5% of our revenues less liquidity rebates, brokerage, clearance and exchange fees and 21.2% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro and Norwegian Krone.

 

Our primary exposure to foreign denominated revenues less liquidity rebates, brokerage, clearance and exchange fees and operating income for the year ended December 31, 2009 is presented in the following table:

 

     Swedish
Krona
    Euro     Norwegian
Krone
    Other Foreign
Currencies
 
     (in millions, except currency rate)  

Average foreign currency rate to the U.S. dollar in 2009

     0.1315       1.3941       0.1598       #  

Percentage of revenues less liquidity rebates, brokerage, clearance and exchange fees

     21.0     4.3     3.1     6.1

Percentage of operating income

     11.3     6.4     3.5     —     

Impact of a 10% adverse currency fluctuation on revenues less liquidity rebates, brokerage, clearance and exchange fees

   $ (30 )   $ (6 )   $ (5 )   $ (9 )

Impact of a 10% adverse currency fluctuation on operating income

   $ (7 )   $ (4 )   $ (2 )   $ (2 )

 

# Represents multiple foreign currency rates.

 

For the year ended December 31, 2008, our primary exposures to foreign currencies were to the Swedish Krona, Euro and Danish Krone. The average foreign currency exchange rate to the U.S. dollar in 2008 was 0.1516 for the Swedish Krona, 1.4712 for the Euro, and 0.1963 for the Danish Krone. Of our total consolidated operating income for the year ended December 31, 2008, 2% was denominated in Swedish Krona, 19% in Euros, and 2% in Danish Krones.

 

Equity Risk

 

Our investments in foreign subsidiaries are exposed to volatility in currency exchange rates through translation of the foreign subsidiaries’ net assets or equity to U.S. dollars. Our primary exposure to this equity risk as of December 31, 2009 is presented by foreign currency in the following table:

 

     Net
Investment
   Impact on
Consolidated
Equity of a 10%
Decrease in
Foreign Currency
     (millions of dollars)

Swedish Krona

   $ 320    $ 32

Euro

     141      14

Norwegian Krone

     133      13

Danish Krone

     92      9

 

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The aggregate impact on our consolidated equity of a 10% decline in the Swedish Krona, Euro, Norwegian Krone and Danish Krone as of December 31, 2008 would have been $49 million.

 

Credit Risk

 

We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by rigorously selecting the counterparties with which we make investments and execute agreements. The financial investment portfolio objective is to invest in securities to preserve principal while maximizing yields, without significantly increasing risk. Credit risk associated with investments is minimized substantially by ensuring that these financial assets are placed with governments, well-capitalized financial institutions and other creditworthy counterparties.

 

Our subsidiaries Nasdaq Execution Services and NASDAQ Options Services may be exposed to credit risk, due to the default of trading counterparties, in connection with the clearing and routing services they provide for our trading customers. System trades in equities routed to other market centers for members of The NASDAQ Stock Market are cleared by Nasdaq Execution Services, as a member of the NSCC. System trades in derivative contracts executed in the opening and closing cross and trades routed to other market centers are cleared by NASDAQ Options Services, as a member of the OCC.

 

Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Pursuant to the rules of the OCC and NASDAQ Options Services’ clearing agreement, NASDAQ Options Services is also liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities and derivative contracts that are subject to these transactions can increase our credit risk. However, we believe that the risk of material loss is limited, as Nasdaq Execution Services’ and NASDAQ Options Services’ customers are not permitted to trade on margin and NSCC and OCC rules limit counterparty risk on self-cleared transactions by establishing credit limits and capital deposit requirements for all brokers that clear with NSCC and OCC. Historically, neither Nasdaq Execution Services nor NASDAQ Options Services has incurred a liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency or the perceived possibility of credit difficulties or insolvency of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions.

 

Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We are required to pledge collateral for commitments with other clearinghouses. See “Guarantees Issued, Credit Facilities Available and Collateral Received for Clearing Operations,” of “Off-Balance Sheet Arrangements,” above for further discussion.

 

We also have credit risk related to transaction fees that are billed to customers on a monthly basis, in arrears. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our Consolidated Balance Sheets. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets.

 

On an ongoing basis we review and evaluate changes in the status of our counterparty’s creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations.

 

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Critical Accounting Policies and Estimates

 

The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The following critical accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risk and uncertainties. Management’s estimates are based on the relevant information available at the end of each period. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion.

 

Revenue Recognition

 

Issuer Services Revenues

 

Global Listing Services

 

Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees do not require any judgments or assumptions by management as these amounts are recognized ratably over the following 12-month period. However, listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration.

 

Market Technology Revenues

 

Market Technology revenues are derived from three primary sources: licensing, support and project revenues, facility management services revenues and other revenues.

 

License, support and project revenues are derived from the system solutions developed and sold by NASDAQ OMX. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of VSOE of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered.

 

Many projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We include the deferral of this revenue in other liabilities and the deferral of costs in other assets in the Consolidated Balance Sheets.

 

When significant production, modification or customization of our software is not required, revenue and costs are recognized over the entire term of the arrangement, once the software has been delivered and services have commenced. We include the deferral of this revenue in other liabilities and the deferral of costs in other assets in the Consolidated Balance Sheets.

 

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Reserve for Bad Debts

 

The reserve for bad debts is maintained at a level that management believes to be sufficient to absorb estimated losses in the accounts receivable portfolio. The reserve is increased by the provision for bad debts which is charged against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and our historical experience with the particular customer. In circumstances where a specific customer’s inability to meet its financial obligations is known (i.e., bankruptcy filings), we record a specific provision for bad debts against amounts due to reduce the receivable to the amount we reasonably believe will be collected. Due to changing economic, business and market conditions, we review the reserve for bad debts monthly and make changes to the reserve through the provision for bad debts as appropriate. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to pay), our estimates of recoverability could be reduced by a material amount.

 

Goodwill and Indefinite-Lived Intangible Assets and Related Impairment

 

Our business acquisitions typically result in the recording of goodwill and intangible assets, and the recorded values of those assets may become impaired in the future. As of December 31, 2009, goodwill totaled $4.8 billion and indefinite-lived intangible assets totaled $0.9 billion. The determination of the value of such goodwill and indefinite-lived intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. Goodwill for our three reporting units and indefinite-lived intangible assets are reviewed for impairment annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1 st carrying values. We assess potential impairments to goodwill and indefinite-lived intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. For goodwill, if the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value. For indefinite-lived intangible assets, impairment exists if the carrying value of the intangible asset exceeds its fair value. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate cash flows. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill and indefinite-lived intangible assets are based on operational performance of our acquired businesses, market conditions, relevant trading multiples of comparable companies, the trading price of our common stock and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. However, disruptions to our business such as continued economic weakness and unexpected significant declines in operating results of reporting units, may result in our having to perform an impairment test for goodwill for some or all of our reporting units and indefinite-lived intangible assets prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill or indefinite-lived intangible asset impairment charges in the future. As of December 31, 2009, there were no reporting units deemed to be at risk of failing the goodwill impairment test. Also, we do not have any indefinite-lived intangible assets at risk of failing our impairment test. There have been no significant events since the timing of our impairment tests that would have triggered additional impairment testing. No impairments of goodwill or indefinite-lived intangible assets were recorded in 2009, 2008 or 2007.

 

Other Long-Lived Assets and Related Impairment

 

We also assess potential impairments to our other long-lived assets, including finite-lived intangible assets, equity method investments, property and equipment and other assets, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We evaluate our equity method investments

 

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for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. In addition, for investments where the market value is readily determinable, we consider the underlying stock price as an additional factor. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. In 2009, we recorded losses of $87 million due to impairment charges related to NASDAQ Dubai and Agora-X. These charges were included in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income. See Note 5, “Equity Method Investments,” to the consolidated financial statements for further discussion. In 2008, we recorded an impairment loss of finite-lived intangible assets of $7 million primarily related to our insurance agency business, which was part of Corporate Services within our Issuer Services segment. This charge was included in asset impairment charges in the Consolidated Statements of Income. See Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion. No other impairments of long-lived assets were recorded in 2009, 2008 or 2007.

 

Amortization Periods of Intangible Assets with Finite-Lives

 

Intangible assets, net, primarily include exchange and clearing registrations, customer relationships, trade names, licenses and technology. Intangible assets with finite-lives are amortized on a straight-line basis over their estimated average useful lives as follows:

 

   

Technology: 1.5—10 years

 

   

Customer relationships: 10—30 years

 

   

Other: 1—10 years

 

The estimated useful life of developed and new technology is based on the likely duration of benefits to be derived from the technology. We consider such factors as the migration cycle for re-platforming existing technologies and the development of future generations of technology. We also give consideration to the pace of the technological changes in the industries in which we sell our products.

 

The estimated useful life of customer relationships is determined based on an analysis of the historical attrition rates of customers and an analysis of the legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of customer relationships.

 

See Note 3, “Acquisitions and Strategic Initiatives,” and Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion of intangible assets.

 

Income Taxes

 

Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from net operating loss carryforwards, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Our deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Management is required to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.

 

In assessing the need for a valuation allowance, we consider all available evidence including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and

 

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the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

 

In addition, the calculation of our tax liabilities involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. We recognize potential liabilities for anticipated tax audit issues in such jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due. While we believe that our tax liabilities reflect the probable outcome of identified tax uncertainties, it is reasonably possible that the ultimate resolution of any tax matter may be greater or less than the amount accrued. If events occur and the payment of these amounts ultimately proves unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

 

Pension and Post-Retirement Benefits

 

Pension and other post-retirement benefit plan information for financial reporting purposes is developed using actuarial valuations. We assess our pension and other post-retirement benefit plan assumptions on a regular basis. In evaluating these assumptions, we consider many factors, including evaluation of the discount rate, expected rate of return on plan assets, healthcare cost trend rate, retirement age assumption, our historical assumptions compared with actual results and analysis of current market conditions and asset allocations. See Note 10, “Employee Benefits,” to the consolidated financial statements for further discussion.

 

Discount rates used for pension and other post-retirement benefit plan calculations are evaluated annually and modified to reflect the prevailing market rates at the measurement date of a high-quality fixed-income debt instrument portfolio that would provide the future cash flows needed to pay the benefits included in the benefit obligations as they come due. Actuarial assumptions are based upon management’s best estimates and judgment.

 

The expected rate of return on plan assets for our U.S. pension plans represents our long-term assessment of return expectations which may change based on significant shifts in economic and financial market conditions. The long-term rate of return on plan assets is derived from return assumptions based on targeted allocations for various asset classes. While we consider the pension plans’ recent performance and other economic growth and inflation factors, which are supported by long-term historical data, the return expectations for the targeted asset categories represents a long-term prospective return.

 

Share-Based Compensation

 

The accounting for share-based compensation requires the measurement and recognition of compensation expense for all share-based awards made to employees based on estimated fair values. Share-based awards, or equity awards, include employee stock options, restricted stock and PSUs. Prior to October 2008, restricted stock generally refers to restricted stock awards and after October 2008, restricted stock generally refers to restricted stock units.

 

We estimate the fair value of employee stock options using the Black-Scholes valuation model. Assumptions used in the Black-Scholes valuation model include the expected life of the award, the weighted-average risk free rate, the expected volatility, and the dividend yield. Our computation of expected life is based on historical exercise patterns. The risk free interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our credit facilities restrict our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock.

 

See Note 11, “Share-Based Compensation,” to the consolidated financial statements for further discussion.

 

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Software Costs

 

We capitalize and amortize significant purchased application software and operational software that are an integral part of computer hardware on the straight-line method over their estimated useful lives, generally two to five years. We expense other purchased software as incurred.

 

Certain costs incurred in connection with developing or obtaining internal use software are capitalized. We capitalize internal and third party costs incurred in connection with the development of internal use software.

 

Under our Market Technology segment, costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process are capitalized after the product has reached technological feasibility. Technological feasibility is established upon completion of a detail program design or, in its absence, completion. Thereafter, all software production costs shall be capitalized. Prior to reaching technological feasibility, all costs are charged to expense. Capitalized costs are amortized on a straight-line basis over the remaining estimated economic life of the product and are included in depreciation and amortization expense in the Consolidated Statements of Income.

 

Foreign Currency Translation

 

Foreign denominated assets and liabilities are remeasured into the functional currency at exchange rates in effect at the balance sheet date through the income statement. Gains or losses resulting from foreign currency transactions are translated using the rates on the dates on which those elements are recognized during the period, and are included in general, administrative and other expense in the Consolidated Statements of Income.

 

Translation gains or losses resulting from translating our subsidiaries’ financial statements from the local functional currency to the reporting currency, net of tax, are included in stockholders’ equity. Assets and liabilities are generally translated at the balance sheet date while revenues and expenses are recorded at the date the transaction occurs or at an applicable average rate.

 

Recently Adopted Accounting Pronouncements

 

ASC Topic 105 —In June 2009, the Financial Accounting Standards Board, or FASB, issued the FASB Accounting Standards Codification, or ASC, Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. The provisions in this guidance do not change current U.S. GAAP, but are intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature that is not included in the FASB Codification is considered non-authoritative. This guidance is effective for interim and annual periods ending after September 15, 2009 and, accordingly, was effective for our annual period ended December 31, 2009. The adoption of this guidance did not have an impact on our financial condition or results of operations, but did impact our financial reporting process by eliminating all references to pre-codification standards.

 

ASC Topic 715 —In December 2008, the FASB issued new accounting guidance contained within ASC Topic 715, “Compensation—Retirement Benefits.” This guidance requires that information about pension and other post-retirement benefit plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of ASC Topic 820, “Fair Value Measurements and Disclosures.” The guidance requires us to separate plan assets into three fair value hierarchy levels and provide a rollforward of the changes in fair value of plan assets classified as Level 3, if any. For further information on the three fair value hierarchy levels, see Note 14, “Fair Value of Financial Instruments,” to the consolidated financial statements. This guidance is effective for NASDAQ OMX’s fiscal year end 2009. Since the new provisions of this guidance require only additional disclosures about our pension and other post-retirement benefit plan assets, the adoption of the new provisions did not affect our financial position or results of operations.

 

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ASC Topic 805 —On January 1, 2009, we adopted on a prospective basis ASC Topic 805, “Business Combinations.” This recently issued guidance significantly changed how business acquisitions were accounted for and will impact financial statements both on the acquisition date and in subsequent periods requiring:

 

   

More assets acquired and liabilities assumed to be measured at fair value as of the acquisition date;

 

   

Liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period; and

 

   

An acquirer to expense acquisition-related costs (e.g., deal fees for attorneys, accountants, investment bankers).

 

The adoption of this guidance did not have a material impact on our consolidated financial statements as of December 31, 2009.

 

ASC Topic 810 —On January 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 810, “Consolidations,” which changed the accounting and reporting for minority interests, which are now characterized as noncontrolling interests and classified as a component of equity. This recently issued guidance requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. All other requirements under the new guidance have been applied prospectively. Noncontrolling interests were $17 million as of December 31, 2009 and December 31, 2008.

 

ASC Topic 815 —On January 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 815 “Derivatives and Hedging,” which enhanced the disclosure requirements about our derivative instruments and hedging activities, thereby improving the transparency of financial reporting. The adoption of this guidance did not have an impact on our financial condition or results of operations but will impact disclosures of our derivative instruments and hedging activities. The additional disclosures required under this guidance are included in Note 15, “Derivative Financial Instruments and Hedging Activities,” to the consolidated financial statements.

 

ASC Topic 470.20 On January 1, 2009, we adopted ASC Topic 470.20, “Debt: Debt with Conversion and Other Options,” which is applicable to our 2.50% convertible senior notes due 2013. This guidance requires us to separately account for the liability and equity components of a convertible debt instrument in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The guidance also requires bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt as part of interest expense being reflected in the income statement.

 

We have adjusted all periods presented to reflect the reclassification of a portion of the carrying value of the 2.50% convertible senior notes from debt to equity and the accretion of the debt discount as part of interest expense. The incremental effect of adopting the provisions under this guidance on our Consolidated Statements of Income for the year ended December 31, 2008 was additional interest expense of $11 million and a tax benefit of $5 million, resulting in a decrease to our net income attributable to NASDAQ OMX of $6 million, or $.03 per diluted share. The incremental effects of adopting the provisions under this guidance on our Consolidated Balance Sheets at December 31, 2008 are presented in the following table (in millions).

 

     Before Adoption of
ASC 470.20
   Effect of Adopting
ASC 470.20
    After Adoption of
ASC 470.20

Deferred tax liabilities

   $ 14    $ 5      $ 19

Non-current deferred tax liabilities

     672      24        696

Total debt obligations

     2,598      (74 ) (1)       2,524

Total liabilities

     8,494      (45     8,449

Additional paid-in capital

     3,518      51 (2)       3,569

Retained earnings

     1,350      (6     1,344

Total NASDAQ OMX stockholders’ equity

     4,241      45        4,286

 

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(1)

As of December 31, 2008, the unamortized debt discount on the 2.50% convertible senior notes included in debt obligations in the Consolidated Balance Sheets was $74 million. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013.

(2)

As of December 31, 2008, the equity component of the 2.50% convertible senior notes included in additional paid-in capital in the Consolidated Balance Sheets was $51 million. This amount is calculated as follows: $85 million of excess principal of the 2.50% convertible senior notes over the carrying amount less $34 million of deferred taxes. The deferred tax liability is determined by multiplying the $85 million of excess principal of the 2.50% convertible senior notes over the carrying amount by the U.S. marginal tax rate of 39.55%.

 

See Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of our 2.50% convertible senior notes.

 

ASC Topic 825— On April 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 825, “Financial Instruments,” which requires disclosure about fair value of financial instruments in interim as well as in annual financial statements. This recently issued guidance, which was effective for us in our interim financial reporting period ended June 30, 2009, did not have a material impact on our financial position, results of operations, and disclosures. See Note 14, “Fair Value of Financial Instruments,” to the consolidated financial statements for disclosure about fair value of financial instruments.

 

ASC Topic 855— In June 2009, we adopted ASC Topic 855, “Subsequent Events,” which provides guidance to establish general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires entities to disclose the date through which subsequent events were evaluated as well as the basis for why that date was selected. The guidance, which was effective for us in our interim financial reporting period ended June 30, 2009, did not have a material impact on our financial position, results of operations, and disclosures. See Note 19, “Subsequent Events,” to the consolidated financial statements for further discussion of the subsequent events that occurred after December 31, 2009.

 

Recently Issued Accounting Pronouncements

 

ASC Topic 605.25 —In October 2009, the FASB issued authoritative guidance on ASC 605.25, “Revenue Recognition—Multiple-Element Arrangements.” This guidance modifies the revenue recognition guidance for arrangements that involve the delivery of multiple-elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements . This accounting guidance is effective for us beginning January 1, 2011, but may be early adopted as of the first quarter of 2010 or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. We are currently evaluating the potential impact, if any, on our consolidated financial statements and timing of the adoption of this guidance.

 

ASC Topic 985.605 —In October 2009, the FASB amended the existing accounting guidance for how entities account for multiple-element arrangements that include both software and hardware elements, which typically resulted in the sale of hardware being accounted for under the software recognition rules. The software revenue recognition guidance in ASC 985-605, “Software-Revenue Recognition,” changes revenue recognition for tangible products containing software elements and non-software elements. The tangible element of the product is always outside of the scope of the software revenue recognition rules, and the software elements of tangible products when the software element and non-software elements function together to deliver the product’s essential functionality are outside of the scope of the software rules. As a result, both the hardware and

 

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qualifying related software elements are excluded from the scope of the software revenue guidance and accounted for under the revised multiple-element revenue recognition guidance discussed above. This accounting guidance is effective for us beginning January 1, 2011 with early adoption permitted. However, early adoption is permitted only when ASC 605.25 is also early adopted as of the same period. We are currently evaluating the potential impact, if any, the adoption of this guidance will have on our consolidated financial statements.

 

Summarized Quarterly Financial Data (Unaudited)

 

     1st Qtr
2009
    2nd Qtr
2009
    3rd Qtr
2009
    4th Qtr
2009
 
     (in millions, except per share amounts)  

Total revenues

   $ 895      $ 889      $ 810      $ 815   

Cost of revenues

     (526     (522     (461     (446
                                

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     369        367        349        369   

Total operating expenses

     203        208        218        220   
                                

Operating income

     166        159        131        149   
                                

Net income attributable to NASDAQ OMX

   $ 94      $ 69      $ 60      $ 43   
                                

Basic earnings per share

   $ 0.47      $ 0.34      $ 0.30      $ 0.20   
                                

Diluted earnings per share

   $ 0.44      $ 0.33      $ 0.28      $ 0.20   
                                
     1st Qtr
2008
    2nd Qtr
2008
    3rd Qtr
2008
    4th Qtr
2008
 

Total revenues

   $ 814      $ 822